[Congressional Record Volume 149, Number 58 (Thursday, April 10, 2003)]
[Senate]
[Pages S5237-S5248]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. KYL (for himself and Mr. Cornyn):
  S. 887. A bill to amend the Internal Revenue Code of 1986 to apply an 
excise tax to excessive attorneys fees for legal judgments, 
settlements, or agreements that operate as a tax; to the Committee on 
Finance.
  Mr. KYL. Mr. President, I rise today to introduce the Intermediate 
Sanctions Compensatory Revenue Adjustment Act of 2003, ISCRAA. This 
legislation will restore to the States billions of dollars in revenue 
due to them from a massive lawsuit recently conducted on their behalf 
the tobacco-Related Medicaid expenses litigation. ISCRAA amends an 
existing provision of the Federal tax code in order to enforce basic, 
universally accepted fiduciary standards governing the award of 
attorneys fees. By applying these standards to the attorneys who 
represented the states in the tobacco settlement, ISCRAA reasonably can 
be expected to restore to the states income with a present value of 
approximately $9 billion. I have included at the end of my statement a 
chart detailing how much each state can expect to recover.
  ISCRAA's tax formula is borrowed from the 1996 Tax Act's Intermediate 
Sanctions Tax, IST, which applies a two-step excise tax to any 
excessive or unreasonable compensation that the managers of a trust pay 
to themselves from the assets of the trust. The IST framework 
encourages the trustee to restore the excessive portion of any fee to 
the trust--when he does so, the IST's punitive taxes do not apply.
  ISCRAA extends the IST to another type of trust relationship: that 
between a lawyer and his client. ISCRAA applies the IST tax formula to 
any unreasonable or excessive income that a lawyer collects from 
litigation resulting in a judgment or settlement in excess of $100 
million. To avoid IST taxes, an attorney must restore the excessive 
portion of the fee to the client.
  As my colleague Senator Cornyn will explain today, the ethical and 
legal abuses that resulted from the 1998 State tobacco settlement make 
the need for this legislation manifest. Senator CORNYN also will 
discuss the law of attorneys' fiduciary obligations, which establishes 
that a fee award is the property of the client--and that any unethical 
fee must be restored to the client, regardless of how the fee award is 
structured.
  I will discuss today how ISCRAA will affect massive litigations 
generally. In order to gauge the reasonableness of a lawyer's fee 
award, ISCRAA adopts and codifies a liberal version of the lodestar-
multiplier system. As I will later explain in greater detail, ISCRAA 
allows fee multipliers of up to 500 percent of reasonable hourly rates. 
This limit is as generous as the most liberal limits adopted by state 
courts, and considerably more generous than the limits that federal 
courts have applied in $100 million cases. ISCRAA's fee formula 
guarantees that attorneys' fiduciary obligations will be respected, 
while providing plaintiff's lawyers with ample incentive to provide 
high-quality legal representation in these types of cases.
  Federal supervision of fee awards resulting from $100 million 
litigations is appropriate for several reasons. First, because of their 
sheer size, these types of lawsuits inevitably operate as a tax on the 
consuming public. Few defendants actually can afford to pay such 
judgments with cash on hand. Instead, the affected industries simply 
will raise the prices that they charge to their customers.
  This is exactly what has happened in the State Medicaid tobacco 
settlement--according to the leading proponents of that litigation. The 
first State attorney general to file suit against the tobacco companies 
has admitted that ``what always happens in these cases is the industry 
passes the costs to the consumer.'' Other commentators agree that this 
has occurred in the tobacco litigation. As one law-review article 
notes, ``the [tobacco] settlement * * * is a tax because it's a set of 
payments made by tobacco companies that depend on how many packs they 
sell; in short, it looks like a tax and quacks like a tax.''
  Because of the way that these massive judgments typically are 
satisfied, it is particularly important to ensure that attorneys are 
paid in proportion to the services that they provided--rather than 
solely on the basis of the size of the recovery. Again, the State 
tobacco settlement highlights the nature of the problem. As two of the 
leading academic commentators have noted, it is ``very troubl[ing]'' 
that under that agreement, ``a group of private citizens [are] getting 
paid a percentage of a tax increase they helped pass.'' The sheer size 
of the tobacco settlement--and the fact that attorneys fees were based 
on this size, rather than on the attorneys' actual efforts--has given 
the fee awards an uncanny resemblance to the medieval practice of tax 
farming. In all but name, the government has licensed a group of 
private individuals to collect a tax from the consuming public.
  I would emphasize at this point that ISCRAA is not an attack on the 
State tobacco lawsuits. The bill does not pass judgment on the merits 
or the appropriateness of this type of litigation. ISCRAA simply is 
designed to ensure that when such lawsuits are brought on the public's 
behalf, the public receive its fair share of the proceeds. If a State 
chooses to seek compensatory revenue from industry for past harms, then 
the resulting tax on the public--minus the reasonable value of the 
legal services actually provided--must go to the State treasury.
  There are several reasons why $100 million is an appropriate 
threshold for applying ISCRAA's fee formula. First, the courts 
themselves have indicated that fee agreements based primarily on the 
size of the recovery tend to become unreasonable when judgements reach 
this size. As one court has stated, ``in much smaller cases, a fee 
award of 33 percent does not present the danger of providing the 
plaintiff's counsel with the windfall that would accompany a `megafund' 
settlement of $100 million or upwards. But it is quite different when 
the figures hit the really big time.'' Or as the Third Circuit notes, 
``courts have generally decreased the percentage awarded [for attorneys 
fees] as the amount recovered increases, and $100 million seems to be 
the informal marker of a 'very large' settlement.''
  The logic of avoiding judgment-based awards in these very large cases 
is straightforward. As one court explains, ``it is not 150 times more 
difficult to prepare, try, and settle a $150 million case than it is to 
try a $1 million case, but the application of a percentage comparable 
to that in a smaller case may yield an award 150 times greater.'' Thus, 
according to another court, ``there is considerable merit'' to 
disallowing standard percentage awards as the ``size of the [recovery] 
fund increases. In many instances the increase [in the recovery] is 
merely a factor of the size of the class and has no direct relationship 
to the efforts of counsel.''

[[Page S5238]]

  It also bears mention that because of its $100 million threshold, 
ISCRAA applies to a fairly limited universe of cases. As courts have 
remarked, ``there are few so-called `megafund' cases with settlements 
over $100 million.'' In 2001, the U.S. Court of Appeals for the Third 
Circuit attempted to catalogue all common-fund cases in federal court 
that resulted in recoveries greater than $100 million. Though such 
litigations have been more frequent in recent years, the Third Circuit 
identified only 22 such cases since 1985. See in re Cendant Corp. 
PRIDES Litig., 243 F.3d 722, 737 (3d Cir. 2001).
  ISCRAA is somewhat broader than the criteria that Cendant Corp. 
employed to collect cases. ISCRAA is not limited to common-fund cases--
it also applies to judgments won on behalf of tax-exempt entities or 
even single individuals. ISCRAA also applies to cases brought in State 
court, and it aggregates identical claims that are brought against 
common defendants in separate actions, in order to prevent evasion of 
its limits through the subdivision of actions. Nevertheless, ISCRAA's 
scope remains fairly narrow. An academic specialist who is familiar 
with developments in this field has reviewed the bill and concluded 
that because of its ``relatively high threshold,'' ISCRAA probably 
would apply only to about 15-20 litigations per year. I will include a 
copy of this professor's letter to me in the Congressional Record.
  Finally, a $100 million threshold also is appropriate because it 
limits ISCRAA's reach to litigations that are a natural subject of 
congress's authority to regulate interstate commerce. It is well-
established that ``Congress' commerce authority includes the power to 
regulate . . . those [economic] activities that substantially affect 
interstate commerce.'' United States v. Morrison, 529 U.S. 598, 609 
(2000). See also United States v. Lopez, 514 U.S. 549 (1995). Both the 
executive and the legislative branches previously have identified $100 
million as guideline for determining whether a matter has a significant 
impact on interState commerce. See, e.g. Executive Order 12866; 
Congressional Review Act, 5 U.S.C. Sec. 804(2); Unfunded Mandates Act, 
2 U.S.C. Sec. 1532(a). Because it is limited to litigations of this 
size, ISCRAA is consistent with congress's power and obligation to 
protect the flow of commerce between states.
  Another point that I would like to emphasize today is that ISCRAA is 
not an anti-plaintiffs' lawyer bill. It is not stingy toward trial 
attorneys. ISCRAA is carefully designed to protect fiduciary interests 
while providing plaintiffs' lawyers with ample incentives to provide 
high-quality legal representation in large litigations. ISCRAA's fee 
formula is as generous as the limits set by the most liberal State 
courts that engage in meaningful review of attorneys fees, and is 
considerably more generous than the Federal courts' practices in $100 
million cases. Moreover, the multiplier criteria that ISCRAA employs 
universally are recognized as legitimate prerequisites for a 
contingency fee--even by trial lawyers' professional associations.
  Federal courts primarily rely on two systems for calculating 
attorneys fees in cases, such as class actions, in which they are 
required to set ``reasonable fees:'' the percentage method and the 
lodestar-multiplier method. The percentage method, as its name implies, 
calculates fees as a percentage of the total recovery. The lodestar 
system, by contrast, requires a court to first calculate a fee based on 
the number of hours that the lawyer worked multiplied by prevailing 
hourly rates, the ``lodestar''. The court then multiplies this lodestar 
fee again in order to reward the attorney for the risk of nonpayment of 
fees that he assumed and for any exceptional services that he provided.
  Over the last thirty years, courts have moved back and forth between 
these two systems. Only a few courts make lodestar-multipliers the 
exclusive means of awarding attorneys fees. But as one academic 
commentator has noted, ``lodestar, or hours-based methods, have been 
adopted in every [federal judicial] circuit.''
  And more importantly, in large-recovery cases, there has been very 
little difference between lodestar and percentage systems. This is 
because even when courts apply a percentage to calculate fees, and as 
judgements become very large, courts typically also calculate a 
reasonable lodestar in order to determine what constitutes a reasonable 
percentage. Thus, again, as the Third Circuit notes, ``courts have 
generally decreased the percentage awarded as the amount recovered 
increases, and $100 million seems to be the informal marker of a `very 
large' settlement.''
  Courts have been wary of awarding fees based on percentages alone. As 
one State supreme court explains: ``to begin the assessment by 
arbitrarily picking a percentage amount without any reliance on a 
cognizable structure invites decisions that are nonobjective and 
inconsistent. What constitutes a reasonable percentage may differ from 
one judge to another depending on each judge's predilections, 
background, and geographical location in the state.''
  Thus ``courts that employ the percentage approach appear to be 
motivated in part by a lodestar dynamic. Because courts are reluctant 
to give fee awards totally incommensurate with the efforts of the 
attorneys, percentage awards generally decrease as the amount of the 
recovery increases.''
  One result of the cross-use of the lodestar and percentage systems is 
that even when courts use the percentage system, those awards 
overwhelmingly tend to reflect a reasonable lodestar multiplier. 
Therefore, even percentage-based cases tend to provide evidence of the 
range of multipliers that the courts consider to be reasonable.
  In 2001, the Third Circuit ``set forth a chart of fee awards given in 
Federal courts since 1985 in class actions in which the settlement fund 
exceeded $100 million and in which the percentage of recovery method 
was used.'' Cendant Corp. The court identified 17 such cases. In almost 
every case, the Third Circuit could calculate the multiplier that was 
used, and ``the lodestar multiplier in those cases never exceeded 
2.99.'' And in the direct lodestar-multiplier cases that court 
identified, the multiplier ranged from 1.2 to 3.25.
  Other courts, surveying smaller cases than the $100 million 
recoveries examined in Cendant Corp., have identified larger 
multipliers. One Federal district court has ``observe[d] that in 
virtually every case where the court notes a lodestar but awards fees 
based upon a percentage, the lodestar multiplier converted from this 
percentage is in the range of 1 to 4.'' Another Federal district court 
has found that ``the range of lodestar multipliers in large and 
complicated class actions runs from a low of 2.26 to a high of 4.5.''
  By contrast, some courts have declared that they would allow only 
lower multipliers. One Federal court has stated that ``only in the most 
exceptional circumstances would this court award a multiplier of 3 or 
greater. . . . this court believes that lodestars enhanced by 
multipliers less than 3 should adequately compensate even the most 
talented counsel.'' And the Seventh Circuit has suggested that ``it may 
be that a doubling of the lodestar would provide a sensible ceiling.''
  On the other hand, the Florida Supreme Court--which is generally 
regarded as one of the more plaintiff-friendly courts in the United 
States--has announced that: ``we set the maximum multiplier available 
in this common-fund category of cases at 5. . . . [A] multiplier which 
increases fees to five times the accepted hourly rate is sufficient to 
alleviate the contingency risk factor involved and attract high level 
counsel to common fund cases while producing a fee that remains within 
the bounds of reasonableness. We emphasize that 5 is a maximum 
multiplier.''
  ISCRAA adopts this more liberal standard. It allows fees as high as 
500 percent of reasonable hourly rates. ISCRAA awards multipliers based 
on two criteria: it allows up to 300 percent to be added onto the 
amount of reasonable hourly fees if a case that involved a substantial 
risk of nonrecovery of fees, and allows an additional 100 percent add-
on if the attorney provided exceptional services that improved the 
plaintiff's recovery.
  The criteria that ISCRAA employs universally are recognized as 
necessary prerequisites to the legitimacy of a contingency fee. 
``Courts in general have insisted that a contingent fee be

[[Page S5239]]

truly contingent. The typically elevated fee reflecting the risk to the 
lawyer of receiving no fee will be permitted only if the representation 
indeed involves a significant degree of risk.'' Charles W. Wolfram, 
Modern Legal Ethics Sec.  9.4, at 532 (1986). The risk requirement has 
been recognized ever since contingency fees first were allowed in the 
United States. The American Bar Association even noted at that time 
that ``a contract for a contingent fee, where sanctioned by law, should 
be reasonable under all the circumstances of the case, including the 
risk and uncertainty of the compensation.'' ABA Canons of Professional 
Ethics, Canon 13 (1908). Indeed, even the professional associations of 
plaintiffs' attorneys have, at times, acknowledged that contingent fees 
should be based on an actual contingency. In a guide to its members, 
the Association of Trial Lawyers of America has ``recommend[ed]'' that 
attorneys ``exercise sound judgment in using a percentage in the 
contingent fee contract that is commensurate with the risk, cost and 
effort required.'' ATLA, Keys to the Courthouse: Quick Facts on the 
Contingency Fee System 13 (1994).
  The criteria that ISCRAA employs are universally accepted--and the 
limits that it sets should be universally acceptable. ISCRAA is not 
intended to alter the considered standards of any jurisdiction. Rather, 
it is intended to enforce those standards--and to correct the 
occasional extreme outlier. Because ISCRAA incorporates a fee formula 
that is substantially more liberal than the usual practices of the 
federal courts in $100 million cases, we can be confident that high-
quality legal representation will remain available to plaintiffs in 
these large litigations. See, e.g. in re Sumitomo Copper Litig., 74 F. 
Supp. 2d 393, S.D.N.Y. 1999, RICO and Commodities Exchange Act case 
resulting in $116 million recovery; attorneys reviewed millions of 
pages of documents located throughout the world, many requiring 
translation from Japanese; Federal district court awards multiplier of 
250 percent for total fee of $32 million.
  Another issue that I will address today is the argument--occasionally 
raised in opposition to proposals to limit attorneys fees--that such 
restrictions violate attorneys' rights to freedom of contract.
  The first principle to keep in mind when questions of attorneys fees 
are considered is that ``a fiduciary relationship exists as a matter of 
law between attorney and client.'' (Illinois Supreme Court.) As one 
academic commentator has noted: ``[I]t is uncontroverted today that a 
lawyer is a fiduciary for, and therefore has a duty to deal fairly 
with, the client. . . . Lawyers are fiduciaries because retention of an 
attorney to exercise 'professional judgment' on the client's behalf 
necessarily involves reposing trust and confidence in the attorney. 
Exercising professional judgment requires that the lawyer advance the 
client's interests as the client would define them if the client were 
well-informed.''
  The lawyer's status as fiduciary places limits on his dealings with 
his client--including with regard to his fee. ``An attorney's freedom 
to contract with a client is subject to the constraints of ethical 
considerations.'' New Jersey Supreme Court. ``In setting fees, lawyers 
are fiduciaries who owe their clients greater duties than are owed 
under the general law of contracts.'' Massachusetts Appeals Court. ``As 
a result of lawyers' special role in the legal system, contracts 
between lawyer and client receive special scrutiny. . . . While freedom 
of contract is the guiding principle underlying contract law, 
contractual freedom is muted in the lawyer-client and lawyer-lawyer 
contexts.'' Joseph M. Perillo, law professor.
  The unique status of attorney fee contracts has led courts to reject 
analogies between such agreements and other business or service 
contracts. Perhaps the fullest exposition is provided by the Arizona 
Supreme Court: ``We realize that business contracts may be enforced 
between those in equal bargaining capacities, even though they turn out 
to be unfair, inequitable or harsh. However, a fee agreement between 
lawyer and client is not an ordinary business contract. The profession 
has both an obligation of public service and duties to clients which 
transcend ordinary business relationships and prohibit the lawyer from 
taking advantage of the client. Thus, in fixing and collecting fees the 
profession must remember that it is a branch of the administration of 
justice and not a mere money getting trade.' ABA Canons of Professional 
Ethics, Canon 12.''

  The same principle has been identified by the Florida Supreme Court: 
There is but little analogy between the elements that control the 
determination of a lawyer's fee and those which determine the 
compensation of skilled craftsmen in other fields. Lawyers are officers 
of the court. The court is an instrument of society for the 
administration of justice. Justice should be administered economically, 
efficiently, and expeditiously. The attorney's fee is, therefore, a 
very important factor in the administration of justice, and if it is 
not determined with proper relation to that fact it results in a 
species of social malpractice that undermines the confidence of the 
public in the bench and bar. It does more than that. It brings the 
court into disrepute and destroys its power to perform adequately the 
function of its creation.''
  In order to protect the lawyer's public role and to enforce his 
fiduciary obligations, the courts read a reasonableness requirement 
into every attorney fee contract. ``[T]he requirement that a fee be 
reasonable in amount overrides the terms of the contract, so that an 
`unreasonable' fee cannot be recovered, even if agreed to by the 
client.'' G. Hazard, Jr. & W. Hodes, The Law of Lawyering 1. 5:205 Fee 
Litigation and Arbitration 120 (1998 Supp.).
  As one court has stated, ``[A]n attorney is only entitled to fees 
which are fair and just and which adequately compensate him for his 
services. This is true no matter what fee is specified in the contract, 
because an attorney, as a fiduciary, cannot bind his client to pay a 
greater compensation for his services than the attorney would have the 
right to demand if no contract had been made. Therefore, as a matter of 
public policy, reasonableness is an implied term in every contract for 
attorney's fees.''

  Finally, when assessing whether a fee is reasonable, courts ask 
whether the fee is proportional to the services that were actually 
provided. ``Fees must be reasonably proportional to the services 
rendered and the situation presented.'' (Arizona Supreme Court.) ``If 
an attorney's fee is grossly disproportionate to the services rendered 
and is charged to a client who lacks full information about all of the 
relevant circumstances, the fee is `clearly excessive' . . . even 
though the client consented to such fee.'' West Virginia Supreme Court.
  Because attorneys are fiduciaries, they simply do not have complete 
freedom of contract in negotiating their fees. An attorney's dealings 
with his client always must reflect that the client comes to him in a 
position of trust--and therefore, the attorney's fee always must be 
reasonable. ISCRAA will help ensure that this important obligation is 
respected.
  Another subject that I would like to address today is ISCRAA's 
effective date. ISCRAA applies to attorney fee payments received after 
June 1, 2002. This effective date is appropriate under the 
circumstances of the State tobacco settlement for several reasons: 
first, Congress routinely enacts major tax legislation with effective 
dates that look back much further than does ISCRAA. The Supreme Court 
has ``repeatedly upheld [such moderately] retroactive tax legislation 
against a due process challenge.'' United States v. Carlton, 512 U.S. 
26, 30-31, 1994; see id. at 33, upholding tax whose ``actual 
retroactive effect . . . extended for a period only slightly greater 
than one year''.
  Second, ISCRAA is not even truly retroactive. ISCRAA does not change 
the substantive law governing attorneys fee awards. Rather, it simply 
enforces established, pre-existing fiduciary standards that already 
bind every attorney in every state. The Model Rules of Professional 
Conduct, at Rule 1.5(a), contain a clear, direct command that ``a 
lawyer's fee shall be reasonable.'' Similarly, the Model Code of 
Professional Responsibility, at DR 2-106, directs that an attorney 
``shall not enter into an agreement for, charge, or collect an illegal 
or clearly excessive fee.'' The Model Code further explains that an 
attorneys fee is ``clearly excessive when, after a review of the facts, 
a

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lawyer of ordinary prudence would be left with a definite and firm 
conviction that the fee is in excess of a reasonable fee.'' Finally, as 
academic commentators point out, in addition to the model rules, ``all 
State rules of professional conduct prohibit attorneys from charging 
excessive fees.''
  As I described earlier, to enforce fiduciary standards, ISCRAA 
codifies and applies a very generous version of the fee multiplier 
system, allowing attorneys fees as high as 500 percent of reasonable 
hourly rates. This is considerably more generous than what Federal 
courts typically allow in large-judgment cases. No attorney can be 
heard to complain that he is subjected to a law that is more generous 
than his existing fiduciary obligations.
  Further, none of the tobacco-settlement attorneys can reasonably 
maintain that they have a vested right to see their fiduciary duties to 
the states go unenforced. Nevertheless, in order to be fair to all 
parties, ISCRAA's excise taxes are applied only to fees that were paid 
after June 1, 2002. By this date, all of the tobacco lawyers twice had 
received notice from George W. Bush that he intended to enact 
legislation to enforce their fiduciary obligations. In February 2000, 
then-candidate Bush promised that he would ``extend[] the `excess 
benefits' provision of the tax code to private lawyers who contract 
with states and municipalities,'' with ``the reasonableness of the fees 
* * * [to] be determined by the standard judicial `lodestar' method.'' 
And as early as February 2001, the current Administration announced 
that it anticipated providing ``additional public health resources for 
the States from the President's proposal to extend fiduciary 
responsibilities to the representatives of States in tobacco 
lawsuits.'' See A Blueprint for New Beginnings: A Responsible Budget 
for America's Priorities 80, Office of Management and Budget, February 
28, 2001.
  Under ISCRAA, all of the attorneys who participated in the State 
tobacco settlement still will be very liberally compensated. Because 
ISCRAA does not apply to the first three-and-a-half years of fee 
payments under the settlement, it exempts the first two-and-a-half 
billion dollars that these lawyers received. Every one of the tobacco 
lawyers will have more than enough money left to pay for the yachts, 
luxury cars, and vacation homes that were purchased with the tobacco 
proceeds. ISCRAA might simply be described as the one-yacht-per-lawyer 
rule.
  But most importantly, because ISCRAA applies to the last year's worth 
of tobacco fee payments, and to all future payments, it will return a 
substantial amount of funds to the States--money that already should 
belong to the States under any reasonable interpretation of fiduciary 
standards. It is critical that these funds be restored in this time of 
widespread fiscal crisis. Today a large number of the States face 
massive budget deficits that threaten their ability to provide health 
care to the indigent, to fully fund public education, and to guarantee 
adequate and effective law enforcement. When such needs risk going 
unmet, fee abuses that cost the States billions of dollars simply can 
no longer be ignored. The States must receive their fair share of the 
tobacco settlement proceeds--funds that are badly needed to support 
basic public services.
  Under the terms of the November 1998 Master Settlement Agreement, 
MSA, between the States and tobacco companies, $500 million in 
cigarette taxes is set aside every year to pay the attorneys who chose 
to have their fees awarded in arbitration. Because extraordinarily high 
fees were awarded by the arbitrators--estimated to total $15 billion--
the $500-million-a-year income stream, which is not adjusted for 
inflation, may have to be paid in perpetuity. In addition to this 
annuity, the MSA also sets aside an additional $1.25 billion in 
cigarette taxes to compensate those lawyers who choose to forego 
arbitration and negotiate their fees directly with the tobacco 
companies.
  The present value of the $500-million-a-year fee stream--discounting 
all future payments for the time value of money--has been 
conservatively estimated at just over $8 billion. Current and future 
payments from the $1.25 billion fee fund are less certain, since the 
grants made from that fund and their disbursement schedule have been 
kept obscure from the public. Because ISCRAA's effective date is June 
1, 2002, ISCRAA will probably recoup for the States an additional $1 
billion above the present value of future $500 million-a-year payments. 
ISCRAA does not affect the first three-and-a-half years of fees paid 
under the MSA. Because these payments almost certainly are adequate to 
pay all reasonable fees incurred in the litigation, ISCRAA would 
restore to the States virtually all fees paid after its effective date. 
Thus the net present value of the sums that ISCRAA would provide to the 
States can conservatively be estimated at $9 billion.
  By restoring these excess fee payments to the states' MSA escrow 
account and returning them to the States on a per capita basis, ISCRAA 
guarantees every State a very substantial recovery. Based on the 
estimates that I have described, even our Nation's smallest State, 
Wyoming, would recoup at least $15 million in tobacco fee payments, and 
other small States, such as North Dakota, would receive approximately 
$20 million. On the other hand, our nation's largest State, California, 
can expect to recoup at least $1 billion. Other large States would also 
see generous returns: Florida, $511 million; Illinois, $397 million; 
Michigan, $318 million; New York, $607 million; Ohio, $363 million; and 
Texas, $667 million.
  Here is how much each State can expect to recover:

Alabama....................................................$142,220,272
Alaska.......................................................20,046,569
Arizona.....................................................164,079,935
Arkansas.....................................................85,496,543
California................................................1,083,230,642
Colorado....................................................137,556,275
Connecticut.................................................108,911,511
Delaware.....................................................25,059,883
District of Columbia.........................................18,294,706
Florida.....................................................511,123,686
Georgia.....................................................261,806,474
Hawaii.......................................................38,745,502
Idaho........................................................41,381,203
Illinois....................................................397,174,614
Indiana.....................................................194,456,664
Iowa.........................................................93,585,167
Kansas.......................................................85,976,825
Kentucky....................................................129,257,603
Louisiana...................................................142,919,876
Maine........................................................40,772,615
Maryland....................................................169,384,021
Massachusetts...............................................203,046,997
Michigan....................................................317,835,940
Minnesota...................................................157,327,166
Mississippi..................................................90,973,451
Missouri....................................................178,937,382
Montana......................................................28,852,605
Nebraska.....................................................54,726,966
Nevada.......................................................63,905,164
New Hampshire................................................39,520,996
New Jersey..................................................269,094,724
New Mexico...................................................58,173,915
New York....................................................606,875,689
North Carolina..............................................257,420,675
North Dakota.................................................20,537,847
Ohio........................................................363,078,559
Oklahoma....................................................110,353,478
Oregon......................................................109,417,889
Pennsylvania................................................392,753,669
Rhode Island.................................................33,525,716
South Carolina..............................................128,305,961
South Dakota.................................................24,140,253
Tennessee...................................................181,945,847
Texas.......................................................666,850,647
Utah.........................................................71,417,756
Vermont......................................................19,470,563
Virginia....................................................226,374,115
Washington..................................................188,496,659
West Virginia................................................57,831,660
Wisconsin...................................................171,532,756
Wyoming......................................................15,791,372

  I ask unanimous consent that the text of the bill and the following 
four articles be printed in the Record.
  There being no objection, the material was ordered to be printed in 
the Record, as follows:

                                 S. 887

       Be it enacted by the Senate and House of Representatives of 
     the United States of America in Congress assembled,

     SECTION 1. SHORT TITLE.

       This Act may be cited as the ``Intermediate Sanctions 
     Compensatory Revenue Adjustment Act of 2003'' (ISCRAA).

     SEC. 2. EXCISE TAXES ON EXCESS FEE TRANSACTIONS OF CERTAIN 
                   ATTORNEYS.

       (a) In General.--Subchapter D of chapter 42 of the Internal 
     Revenue Code of 1986 (relating to failure by certain 
     charitable organizations to meet certain qualification 
     requirements) is amended by adding at the end the following 
     new section:

     ``SEC. 4959. TAXES ON EXCESS FEE TRANSACTIONS.

       ``(a) Initial Taxes.--There is hereby imposed on the 
     collecting attorney in each excess fee transaction a tax 
     equal to 5 percent of the excess fee. The tax imposed by this 
     paragraph shall be paid by any collecting attorney referred 
     to in subsection (f)(1) with respect to such transaction.
       ``(b) Additional Tax on the Collecting Attorney.--In any 
     case in which a tax is imposed by subsection (a) on an excess 
     fee transaction and the excess fee involved in such 
     transaction is not corrected within the

[[Page S5241]]

     taxable period, there is hereby imposed a tax equal to 200 
     percent of the excess fee involved. The tax imposed by this 
     paragraph shall be paid by any collecting attorney referred 
     to in subsection (f)(1) with respect to such transaction.
       ``(c) Excess Fee Transaction; Excess Fee.--For purposes of 
     this section--
       ``(1) Excess fee transaction.--
       ``(A) In general.--The term `excess fee transaction' means 
     any transaction in which a fee is provided by an applicable 
     plaintiff (including payments resulting from litigation on 
     behalf of an applicable plaintiff determined on an hourly or 
     percentage basis, whether such fee is paid from the 
     applicable plaintiff's recovery, pursuant to a separately 
     negotiated agreement, or in any other manner), directly or 
     indirectly, to or for the use of any collecting attorney with 
     respect to such applicable plaintiff if the amount of the fee 
     provided exceeds the value of the services received in 
     exchange therefor or subsection (g)(1) applies.
       ``(B) Determination of value.--For purposes of subparagraph 
     (A), in determining whether the amount of the fee provided 
     exceeds the value of the services received in exchange 
     therefor, the value of the services shall be the sum of--
       ``(i) the reasonable expenses incurred by the collecting 
     attorney in the course of the representation of the 
     applicable plaintiff, and
       ``(ii) a reasonable fee based on--

       ``(I) the number of hours of non-duplicative, professional 
     quality legal work provided by the collecting attorney of 
     material value to the outcome of the representation of the 
     applicable plaintiff, taking into account the factors 
     described in subparagraphs (B) and (D) of subsection (h)(2),
       ``(II) reasonable hourly rates for the individuals 
     performing such work based on hourly rates charged by other 
     attorneys for the rendition of comparable services, including 
     rates charged by adversary defense counsel in the 
     representation, taking into account the factors described in 
     subparagraphs (A), (C), (E), and (G) of subsection (h)(2), 
     and
       ``(III) to the extent such items are not taken into account 
     in establishing the reasonable hourly rates under subclause 
     (II), an appropriate adjustment rate determined in accordance 
     with subparagraph (C) to compensate the collecting attorney 
     for periods of substantial risk of non-payment of fees and 
     for skillful or innovative services which increase the amount 
     of the applicable plaintiff's recovery.

       ``(C) Adjustment rate.--
       ``(i) In general.--For purposes of this paragraph, an 
     appropriate adjustment rate is a percentage of the reasonable 
     hourly rate under subparagraph (B)(ii)(II) which is added to 
     the amount of such rate and which is not more than the sum of 
     one risk percentage and one skill percentage described in 
     clauses (ii) and (iii), respectively.
       ``(ii) Risk percentage.--For purposes of this subparagraph, 
     the term `risk percentage' means a percentage rate that is 
     proportional to the collecting attorney's risk of nonrecovery 
     of fees and which is--

       ``(I) in the case of a collecting attorney who assumed a 
     substantial risk of nonpayment of fees, not more than 100 
     percent,
       ``(II) in the case of a collecting attorney who assumed a 
     substantial risk of nonpayment of fees and devoted more than 
     8,000 hours of legal work (as described in subparagraph 
     (B)(ii)(I)) and more than 2 years to the case before 
     resolution of all claims, not more than 200 percent, or
       ``(III) in the case of a collecting attorney who assumed a 
     substantial risk of nonpayment of fees and devoted more than 
     15,000 hours of legal work (as described in subparagraph 
     (B)(ii)(I)) and more than 4 years to the case before 
     resolution of all claims, not more than 300 percent.

       ``(iii) Skill percentage.--For purposes of this 
     subparagraph, the term `skill percentage' means, in the case 
     of a collecting attorney who has demonstrated exceptionally 
     skillful or innovative legal service which generated a 
     recovery for the applicable plaintiff substantially greater 
     than the typical recovery in similar cases, a percentage rate 
     that is proportional to the increase in the applicable 
     plaintiff's recovery and that is not more than 100 percent.
       ``(iv) Limitation.--An appropriate adjustment rate shall 
     not increase the collecting attorney's fee above an amount 
     that is proportional to the applicable plaintiff's recovery.
       ``(D) Court approval of fees.--Fee payments approved by any 
     court shall be presumed to not be in excess of the value of 
     the services received in exchange therefor if the court 
     approving the fee--
       ``(i) did not approve an adjustment rate greater than that 
     determined to be appropriate under subparagraph (C) in a case 
     where such fee included an adjustment rate, and
       ``(ii) obtained and relied upon a report of a legal 
     auditing firm with respect to such fee in accordance with the 
     procedures in subsection (h).
       ``(2) Excess fee.--The term `excess fee' means the excess 
     referred to in paragraph (1)(A).
       ``(d) Joint and Several Liability.--For purposes of this 
     section, if more than 1 person is liable for any tax imposed 
     by subsection (a), all such persons shall be jointly and 
     severally liable for such tax.
       ``(e) Applicable Plaintiff.--For purposes of this section, 
     the term `applicable plaintiff' means any person represented 
     by a collecting attorney with respect to a claim described in 
     subsection (f)(1).
       ``(f) Other Definitions and Rules.--For purposes of this 
     section--
       ``(1) Collecting attorney.--The term `collecting attorney' 
     means any person engaged in the practice of law who 
     represents--
       ``(A) any governmental entity, including any State, 
     municipality, or political subdivision of a State, or any 
     person acting on such entity's behalf, including pursuant to 
     Federal or State Qui Tam statutes, in a claim for recoupment 
     of payments made or to be made by such entity to or on behalf 
     of any natural person by reason, directly or indirectly, of a 
     breach of duty that causes damage to such natural person,
       ``(B) any organization described in paragraph (3) or (4) of 
     section 501(c) and exempt from tax under section 501(a), in a 
     claim for damages based on a breach of duty, whether civil or 
     criminal, causing damage to such organization,
       ``(C) any natural person seeking to recover damages in a 
     claim based on breaches of duty, whether civil or criminal, 
     causing damage to such natural person, or
       ``(D) any assignee or other holder of claims described in 
     subparagraph (A), (B), or (C),
     when 1 or more of such claims, whether or not joined in 1 
     action, involve the same or a coordinated group of 
     plaintiff's attorneys or similarly situated defendants, arise 
     out of the same transaction or set of facts or involve 
     substantially similar liability issues, and result in 
     settlements or judgments aggregating at least $100,000,000.
       ``(2) Taxable period.--The term `taxable period' means, 
     with respect to any excess fee transaction, the period 
     beginning with the date on which the transaction occurs and 
     ending 90 days after the earliest of--
       ``(A) the date of the mailing of a notice of deficiency 
     under section 6212 with respect to the tax imposed by 
     subsection (a), or
       ``(B) the date on which the tax imposed by subsection (a) 
     is assessed.
       ``(3) Correction.--
       ``(A) General rule.--Any excess fee transaction is 
     corrected by undoing the excess fee to the extent possible 
     and taking any additional measures necessary to place the 
     applicable plaintiff in a financial position not worse than 
     that in which such plaintiff would be if the collecting 
     attorney were dealing under the highest fiduciary standards.
       ``(B) Payment of excess fees.--
       ``(i) In general.--Except as provided in clause (ii), a 
     collecting attorney corrects an excess fee transaction by 
     paying any excess fees plus interest to the applicable 
     plaintiff.
       ``(ii) Certain settlements.--In the case of excess fees 
     arising from or related to that certain Master Settlement 
     Agreement of November 23, 1998, and other, concluded 
     Settlement Agreements based on State health care expenditures 
     pursuant to title XIX of the Social Security Act (42 U.S.C. 
     1396 et seq.), including lawsuits involving the States of 
     Florida, Minnesota, Mississippi, and Texas, the collecting 
     attorney corrects an excess fee transaction by paying any 
     excess fees plus interest to the 50 States in proportion to 
     each State's share of the United States population.
       ``(C) No waiver of fee.--No collecting attorney may avoid 
     imposition of any tax imposed by this section by transferring 
     any portion of the excess fee or refusing to accept any 
     portion of the excess fee.
       ``(g) Disclosure Requirements.--
       ``(1) Treatment as excess fee.--Any fee provided after the 
     date of the enactment of this subsection by an applicable 
     plaintiff (including payments resulting from litigation on 
     behalf of an applicable plaintiff determined on an hourly or 
     percentage basis, whether such fee is paid from the 
     applicable plaintiff's recovery, pursuant to a separately 
     negotiated agreement, or in any other manner), directly or 
     indirectly, to or for the use of any collecting attorney with 
     respect to such applicable plaintiff shall be deemed to be an 
     excess fee provided in an excess fee transaction unless the 
     disclosure requirements described in paragraph (2) are met.
       ``(2) Contents of statement.--The disclosure requirements 
     of this paragraph are met for any taxable year in which a 
     collecting attorney receives any fees with respect to a claim 
     described in subsection (f)(1), if such collecting attorney--
       ``(A) includes in the return of tax for such taxable year a 
     statement including the information described in subsection 
     (c)(1) with respect to such claim, and
       ``(B) provides a statement including the information 
     described in subsection (c)(1) to the applicable plaintiff 
     prior to the deadline (including extensions) for filing such 
     return.
       ``(h) Legal Auditing Firm.--
       ``(1) In general.--In any case before a Federal district 
     court or a State court in which the court approves fees paid 
     to a collecting attorney, the court shall seek bids from 
     legal auditing firms with a specialty in reviewing attorney 
     billings and select 1 such legal auditing firm to review the 
     billing records submitted by the collecting attorney, under 
     the same standards the firm would use if it were hired by a 
     private party to review legal bills submitted to the party, 
     for the reasonableness of such attorney's billing patterns 
     and practices. The court shall require the collecting 
     attorney to submit billing records, cost records, and any 
     other information sought by such firm in its review.

[[Page S5242]]

       ``(2) Review by legal auditing firm.--In reviewing the 
     billing records and work performed by the collecting 
     attorney, the legal auditing firm shall address all relevant 
     matters, including--
       ``(A) the hourly rates of the collecting attorney compared 
     with the prevailing market rates for the services rendered by 
     the collecting attorney,
       ``(B) the number of hours worked by the collecting attorney 
     on the case compared with other cases that the collecting 
     attorney worked on during the same period,
       ``(C) whether the collecting attorney performed tasks that 
     could have been performed by attorneys with lower billing 
     rates,
       ``(D) whether the collecting attorney used appropriate 
     billing methodology, including keeping contemporaneous time 
     records and using appropriate billing time increments,
       ``(E) whether particular tasks were staffed appropriately,
       ``(F) whether the costs and expenses submitted by the 
     collecting attorney were reasonable,
       ``(G) whether the collecting attorney exercised billing 
     judgment, and
       ``(H) any other matters normally addressed by the legal 
     auditing firm when reviewing attorney billings for private 
     clients.
       ``(3) Filing of report; response; burden of proof.--The 
     court shall set a date for the filing of the report of the 
     legal auditing firm, and allow the collecting attorney or any 
     applicable plaintiff to respond to the report within a 
     reasonable time period. The report shall be presumed correct 
     unless rebutted by the collecting attorney or any applicable 
     plaintiff by clear and convincing evidence.
       ``(4) Fee for legal auditing firm.--The fee for the report 
     of the legal auditing firm shall be paid from the collecting 
     attorney's fee award, the applicable plaintiff's recovery, or 
     both in a manner determined by the court.
       ``(i) Regulations.--The Secretary shall prescribe such 
     regulations as may be necessary or appropriate to carry out 
     this section, including regulations to prevent avoidance of 
     the purposes of this section and regulations requiring 
     recordkeeping and information reporting.''.
       (b) Conforming and Clerical Amendments.--
       (1) Subsections (a), (b), and (c) of section 4963 of the 
     Internal Revenue Code of 1986 are each amended by inserting 
     ``4959,'' after ``4958,''.
       (2) Subsection (e) of section 6213 of such Code is amended 
     by inserting ``4959 (relating to excess fee transactions),'' 
     before ``4971''.
       (3) Paragraphs (2) and (3) of section 7422(g) of such Code 
     are each amended by inserting ``4959,'' after ``4958,''.
       (4) The heading for subchapter D of chapter 42 of such Code 
     is amended to read as follows:

``Subchapter D--Failure by Certain Charitable Organizations and Persons 
 to Meet Certain Qualification Requirements and Fiduciary Standards.''.

       (5) The table of subchapters for chapter 42 of such Code is 
     amended by striking the item relating to subchapter D and 
     inserting the following:

``Subchapter D. Failure by certain charitable organizations and persons 
              to meet certain qualification requirements and fiduciary 
              standards.''.
       (6) The table of sections for subchapter D of chapter 42 of 
     such Code is amended by adding at the end the following new 
     item:

``Sec. 4959. Taxes on excess fee transactions.''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to excess fees paid on or after June 1, 2002.

     SEC. 3. DECLARATORY JUDGMENTS RELATING TO EXCISE TAXES ON 
                   EXCESS FEE TRANSACTIONS OF CERTAIN ATTORNEYS.

       (a) In General.--Subchapter B of chapter 76 of the Internal 
     Revenue Code of 1986 (relating to judicial proceedings) is 
     amended by redesignating section 7437 as section 7438 and by 
     inserting after section 7436 the following new section:

     ``SEC. 7437. DECLARATORY JUDGMENTS RELATING TO TAX ON EXCESS 
                   FEE TRANSACTIONS.

       ``(a) In General.--In a case of actual controversy 
     involving--
       ``(1) a determination by the Secretary or the collecting 
     attorney with respect to the imposition of the excise tax on 
     excess fee transactions on such collecting attorney under 
     section 4959, or
       ``(2) a failure by the Secretary or the collecting attorney 
     to make such a determination,
     upon the filing of an appropriate pleading by an applicable 
     plaintiff, the Tax Court may make a declaration with respect 
     to such determination or failure. Any such declaration shall 
     have the force and effect of a decision of the Tax Court and 
     shall be reviewable as such.
       ``(b) Deferential Review.--If a collecting attorney's fee 
     has been approved by a court in accordance with section 
     4959(c)(1)(D) or by the Secretary pursuant to section 4959, 
     the Tax Court shall review the fee only for an abuse of 
     discretion.
       ``(c) Legal Auditing Firm.--In any petition for a 
     declaration referred to in subsection (a):
       ``(1) No previous report.--If a report by a legal auditing 
     firm that meets the requirements of section 4959(h) has not 
     been previously produced and relied on by another court, the 
     Tax Court shall hire such a legal auditing firm and rely on 
     its report pursuant to the procedures in section 4959(h).
       ``(2) Second report.--
       ``(A) In general.--If a report by a legal auditing firm has 
     been approved by a court in accordance with section 4959, the 
     Tax Court shall hire a second legal auditing firm upon the 
     request of the petitioner.
       ``(B) Fee for report.--The Tax Court may direct the 
     petitioner to pay the fee for any report of a legal auditing 
     firm provided pursuant to subparagraph (A).
       ``(d) Time for Bringing Action.--No proceeding may be 
     initiated under this section by any person until 90 days 
     after such person first notifies the Secretary of the excess 
     fee transaction with respect to which the proceeding relates.
       ``(e) Definitions.--For purposes of this section, any term 
     used in this section and also in section 4959 shall have the 
     meaning given such term by section 4959.''.
       (b) Clerical Amendment.--The table of sections for 
     subchapter B of chapter 76 of the Internal Revenue Code of 
     1986 is amended by striking the item relating to section 7437 
     and by inserting the following new items:

``Sec. 7437. Declaratory judgments relating to tax on excess fee 
              transactions.
``Sec. 7438. Cross references.''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to actions after the date of the enactment of 
     this Act.
                                  ____


            [From the Connecticut Law Review, Summer, 2001]

   A Most Dangerous Indiscretion: the Legal, Economic, and Political 
             Legacy of the Governments' Tobacco Litigation

                        (By Margaret A. Little)

       In 1997 and 1998, the tobacco companies settled with four 
     states who were approaching trial under agreements valued at 
     around $40 billion. This was followed in late 1998 by a 
     Master Settlement Agreement (``MSA'') wherein forty-six 
     states entered into a massive $206 billion settlement 
     agreement with the tobacco companies. In addition, the 
     tobacco companies agreed to contribute $1.5 billion to an 
     anti-smoking ``education and advertising campaign'' and $250 
     million ``for a foundation dedicated to reducing teen 
     smoking.'' These agreements which total $246 billion are 
     reported to represent the largest privately negotiated 
     redistribution of wealth in world history. MSA further 
     obligates the tobacco companies to pay the private practice 
     attorneys hired by the settling states what has been 
     variously estimated at $8 to $10 billion in net present 
     value. Each state's legislature must pass a ``Qualifying 
     Statute'' to be eligible for the ``damage'' payments. The 
     agreement could not be fully implemented until courts in 
     eighty percent of the states ``in number and aggregate 
     damages'' has approved the settlement. The most significant 
     difference between the settlement with the states and the 
     1997 federal settlement is that the MSA confers no 
     protections on the tobacco companies from suits by smokers.
                                  ____


                [From the Economist, February 13, 1999]

                        Knights in Golden Armour

       For Americans, lawyers seem to embody extremes of both 
     heroism and greed, sometimes at the same time. A film 
     currently playing to packed cinemas across the country, ``A 
     Civil Action'', tells the true story of one crusading lawyer 
     (played by John Travolta) who bankrupted himself trying to 
     sue two big companies which had polluted a small town's 
     drinking water. But when they win, even lawyer-heroes expect 
     to be well paid. The small group of contingency-fee lawyers 
     who helped state governments bring the tobacco industry to 
     heel are about to collect fees so colossal that they dwarf 
     even the excesses of Wall Street investment bankers in the 
     mad, bad 1980s.
       Tobacco remains a bonanza for lawyers in all kinds of ways. 
     On February 10th, a Californian jury awarded $51.5m in 
     damages against Philip Morris to a woman with inoperable lung 
     cancer. The award, by far the largest in a smoking-related 
     lawsuit, was a brusque reminder that, despite last year's 
     settlement with the states, tobacco companies remain 
     vulnerable to suits brought by individuals; and that as long 
     as smokers want compensation, lawyers will reap fortunes.
       The legal profession is still trying to digest the 
     implications of the staggering $8.1 billion a three-man 
     arbitration panel awarded in December to lawyers for the work 
     they did in helping Florida, Mississippi and Texas win a 
     settlement from the tobacco industry for health-care costs. 
     Over the next six months, the panel is expected to use the 
     same criteria to set fees for the lawyers who represented 
     dozens of other states in the negotiations which led to a 
     national settlement last November. If they do, 250-450 lucky 
     lawyers could collect between $20 billion and $25 billion in 
     fees.
       ``These amounts are grotesque and absurd,'' says Lester 
     Brickman, a law professor at New York's Cardozo School of 
     Law. ``Most

[[Page S5243]]

     of this money should have gone to the states.'' Mr Brickman, 
     an expert on legal fees, predicts that the flood of cash 
     going to a small group of trial lawyers will finance a wave 
     of mass litigation against other industries, including 
     alcohol and fast food, on similar public-health grounds. This 
     approach is already being pursued by big-city mayors against 
     gun manufacturers and distributors with the help of some of 
     the same law firms which represented the states in their 
     suits against the tobacco companies.
       The lawyers involved in the tobacco suits insist that the 
     awards are fair, reflecting the risk they ran by taking on 
     the tobacco firms when no one, including the state attorneys-
     general, thought they had much chance of winning. The lawyers 
     worked without pay, and as part of the settlement have now 
     agreed to submit to arbitration rather than insist on a share 
     of the money the states will receive, which is what the 
     contracts they signed with many state governments would have 
     given them. ``The fees are huge,'' admits Philip Anderson, 
     the president of the American Bar Association. ``But these 
     lawyers were able to do something that governments have never 
     been able to achieve on their own--assemble enough evidence 
     to bring the tobacco industry to account. And the fees were 
     agreed by sophisticated parties on both sides.''
       Too much sophistication, in fact, may be the problem. 
     Unusually, neither plaintiffs nor defendants in these cases 
     seem to have had much interest in limiting the lawyers' fees. 
     Officially, these fees are being paid by the tobacco firms, 
     which spares the state attorneys-general the politically 
     embarrassing task of having to pay the lawyers huge amounts 
     of money out of their state's share of the settlement. The 
     lawyers agreed to arbitration because they knew that state 
     politicians could never have honoured their contingency 
     contracts, which would themselves have become the subject of 
     prolonged litigation. Most judges would have reduced the 
     amounts the lawyers would get.
       In any case, the arbitration is a mere fig-leaf. The money 
     going tot he lawyers was clearly part of the overall amount 
     that the tobacco companies were willing to pay to settle the 
     case. Whatever the lawyers get, the states do not.
       The reaction of the tobacco companies has also been 
     suspiciously muted. Brown & Williamson, one of the firms, 
     called the fee award ``obscene'', but the other companies 
     said little. One reason may be that they do not really care 
     about the size of the total fee award. Their deal with the 
     states caps the amount they must pay all the states' lawyers 
     of $500m a year. This will be divided by the lawyers 
     according to their proportions of the overall fee award. 
     Tobacco companies will also shell out another $1.25 billion 
     over the next five years to pay off those lawyers who do not 
     want to wait years to receive all their money. So the 
     companies' exposure is limited, no matter what the lawyers 
     get.
       In effect, the lawyers are becoming joint business partners 
     with the states and the tobacco companies in leaving a tax on 
     smokers. The overall settlement has been widely misreported 
     as giving the states $206 billion. But this is only the 
     amount that they will receive in the first 25 years. The 
     settlement actually runs in perpetuity, turning the tobacco 
     firms into permanent tax-collection agencies for the states. 
     The firms have already raised prices by about 50 cents a pack 
     to pay for the settlement. The $500m they will be handing 
     over to the lawyers annually will also be paid for by 
     smokers.
       If the total fee award to lawyers reaches $25 billion, 
     these annual payments will continue for the next 50 years. If 
     the outstanding fees are inflation-adjusted, as the 
     arbitrators decided they should be in Florida, Mississippi 
     and Texas, the payments to the lawyers and their heirs could 
     go on for ever, because the $500m annual cap will not be 
     inflation-adjusted. The tobacco firms are threatening to 
     challenge the inflation-adjustment provision in the courts 
     because they say it is not part of the national settlement 
     agreement.
       But inflation-adjusted or not, today's smokers--70% of whom 
     earn less than $40,000 a year--will be paying the lawyers as 
     well as the states, via the tobacco companies, for the rest 
     of their (abbreviated) lives. Tobacco companies' bottom-lines 
     will barely be affected. This is why tobacco shares rose 
     after the settlement with the states was announced in 
     November and barely reacted when the first gigantic fee 
     awards to lawyers were made in December.
       How the arbitrator came up with such a huge figure is 
     something of a mystery. The awards range from 20-35% of what 
     the three states will receive. But this is far more than the 
     8% fee agreed last May by the lawyers in Minnesota, the only 
     state actually to take its tobacco case all the way to trial.
                                  ____


 Morales, Friend Indicted in Texas Tobacco Case--Former AG Has Denied 
            Wrongdoing; Federal Charges Include Tax Evasion

             [From the Dallas Morning News, March 7, 2003]

                          (By George Kuempel)

       Austin.--Former Texas Attorney General Dan Morales and a 
     lawyer friend were indicted on federal charges Thursday, 
     accused of trying to defraud the state of hundreds of 
     millions in legal fees from its suit against the tobacco 
     industry.
       Mr. Morales, a Democrat who lost a bid for governor last 
     year, also was charged with illegally converting campaign 
     funds to personal use, filing bogus income tax information 
     and falsifying a bank loan application.
       He and Marc Murr of Houston, who also was indicted, are 
     expected to surrender to the FBI on Friday. They previously 
     have denied wrongdoing.
       U.S. Attorney Johnny Sutton called it ``a case of an 
     elected official charged with abusing the public trust.''
       ``This indictment alleges he violated that trust by 
     backdating contracts, forging government records and 
     converting campaign contributions to personal use,'' Mr. 
     Sutton said at the federal courthouse.
       The 12-count indictment issued by a federal grand jury 
     stemmed from a long-running investigation into payment of 
     legal fees from the state's $17.3 billion settlement with 
     tobacco companies when Mr. Morales was attorney general in 
     1998.
       It's a case that has been at the center of a political 
     wrangling for several years between Mr. Morales and 
     Republicans. And it comes just weeks after his brother, San 
     Antonio musician Michael Morales, pleaded guilty to 
     attempting to extort $280,000 from Democrat Tony Sanchez 
     during the campaign against Gov. Rick Perry.
       Dan Morales, now a private lawyer in Austin, is accused of 
     fraudulently trying to secure millions of dollars in fees for 
     Mr. Murr for work on the tobacco case that he did not do by 
     backdating contracts and forging government documents.
       The indictments of Dan Morales and Marc Murr are another 
     chapter in Texas' landmark $17.3 billion settlement with 
     tobacco companies that has included twists, turns and 
     reversals.
       Initial debate: Gov. George W. Bush and state Attorney 
     General John Cornyn, both Republicans, complained about $3.3 
     billion paid to five attorneys for their work on the 1998 
     settlement. Added intrigue: Mr. Morales said his friend Marc 
     Murr of Houston was also among the state's tobacco lawyers 
     and was due about $500 million. Mr. Morales had publicly 
     hired the five private attorneys and disclosed their 
     contracts; the deal with Mr. Murr was initially secret.
       The Murr deal: Mr. Morales said Mr. Murr was hired to be a 
     watchdog over the other lawyers and to advise him during the 
     litigation. The other lawyers initially said that they had 
     never heard of Mr. Murr, and later said he did little or no 
     work on the case.
       The initial inquiries: Mr. Cornyn, who succeeded Mr. 
     Morales as attorney general in 1999, began investigating the 
     Murr contract. Federal investigators started their inquiry 
     into the deals and the documents.
       The Murr money: In December 1998, Mr. Murr went before a 
     national arbitration panel and was awarded $1 million over 30 
     years from tobacco companies. Unbeknownst to the other 
     tobacco lawyers, Mr. Morales and Mr. Murr also formed a state 
     arbitration panel in September 1998 that gave Mr. Murr $260 
     million--an award he contended was binding. He cited a Jan. 
     31, 1997, contract with the state as evidence.
       Cornyn objects: In May 1999, Mr. Cornyn said that the Jan. 
     31, 1997, contract between Mr. Morales and Mr. Murr was a 
     fake and did not exist when it supposedly was signed.
       Sudden reversal: In U.S. District Court, Mr. Murr's 
     attorney dropped the $260 million claim on May 6, 1999. Mr. 
     Murr's attorney also told the court that at least one of the 
     contracts signed by his client and Mr. Morales was backdated 
     by as much as a year. Mr. Morales had denied any manipulation 
     of the contract. He said the investigations are spawned by 
     partisan political attacks.
       Mr. Morales is reported to have hired Mr. Murr without the 
     knowledge of the team of five high-profile trial lawyers he 
     contracted to represent the state in its lawsuit against the 
     big tobacco companies.
       At one time, Mr. Murr stood to receive $520 million as his 
     share of the $3.3 billion in fees awarded to the lawyers in 
     the case.
       His share was later reduced to $1 million, but he gave up 
     his claim to the money when allegations arose that he had 
     done no work on the case.
       According to the indictment, Mr. Morales and Mr. Murr 
     ``fabricated an outside counsel agreement, backdated to 
     January 31, 1997, which purportedly required the State to pay 
     a reasonable fee to Defendant Murr's corporation.''
       As part of the ``scheme,'' the two men fabricated another 
     outside counsel agreement, backdated to Oct. 17, 1996, which 
     assigned 3 percent of the state's recovery to Mr. Murr's 
     corporation.
       ``Defendant Morales directed a state employee to type and 
     then backdate the bogus agreement. Three percent of the 
     state's recovery was estimated to be $520 million,'' 
     according to the indictment.
       In May 1999, two forensic experts hired by The Dallas 
     Morning News said that the Morales-Murr contract shows 
     evidence of ``severe document manipulation.''
       The private lawyers who handled the tobacco case were John 
     Quinn and John Eddie Williams of Houston, Walter Umphrey and 
     Wayne Reaud of Beaumont, and Harold Nix of Daingerfield. They 
     have defended their actions in the case.
       Mr. Morales surprised some when he announced plans in 1995 
     to sue several big tobacco companies to help recover the 
     state's cost of treating patients suffering from tobacco-
     related illnesses.
       But questions were raised about the fees by Republicans, 
     including John Cornyn, who became attorney general in 1999 
     after Mr. Morales decided not to run again.

[[Page S5244]]

       Mr. Cornyn began a state investigation, and Andy Taylor, a 
     former assistant attorney general who headed that said of Mr. 
     Morales: ``He's toast.
       ``We looked at the computer hard drives and could tell to 
     the second when the backdating on the contracts occurred.''
       Mr. Taylor, a Houston lawyer, said prosecutors have 
     informed him that he will be called as a witness in the case. 
     He said delays in the indictment probably were because of the 
     lack of a permanent U.S. attorney for months before Mr. 
     Sutton's appointment and confirmation.
       Mr. Morales had slammed the inquiry as politically 
     motivated. ``There's not one shred of evidence or a single 
     document to support these lurid accusations.'' he said in 
     1999.
       Micheal Ramsey, an attorney for Mr. Murr, said Thursday of 
     the charges, ``My initial take is that it's unfair.''
       Both men are accused of conspiracy and mail fraud, which 
     can carry a penalty of up to five years in prison and a 
     $250,000 fine.
       The indictment also charges that Mr. Morales used $400,000 
     in campaign donations to buy a $775,000 house in Travis 
     County and he is accused of understating by $400,000 his 
     liabilities in applying for a $600,000 loan in 1999.
       Making a false application on a loan application is a 
     charge punishable by up to 30 years in prison and a $1 
     million fine.
       According to the indictments, Mr. Morales defrauded the 
     state, the Texas Ethics Commission, his contributors and 
     others from 1997 and 1999 by converting political donations 
     to personal use.
       He is charged in another court with making false statements 
     on his 1998 federal income tax return.
       The indictment alleges that in his joint return filed with 
     his wife, Mr. Morales listed their taxable income as $39,734 
     when he knew full well that ``their joint taxable income was 
     substantially in excess'' of that amount.


                              THE CHARGES

       Charges against former Attorney General Dan Morales include 
     accusations that he:
       Fraudulently tried to funnel $260 million in legal fees 
     from the state tobacco case to a friend, who also was 
     indicted.
       Illegally converted nearly $400,000 in campaign 
     contributions to his personal use.
       Made false statements to get a $600,000 mortgage for his 
     Travis County house.
       Filed a false tax return that understated his taxable 
     income for 1998.
                                  ____


             [From the Wall Street Journal, March 10, 2003]

                           Faust in Texas II

       The indictment of former Texas Attorney General Dan Morales 
     lifts the lid ever so slightly over one of the mysteriously 
     ignored scandals of the 1990s. We mean the national tobacco 
     settlement that turned into a $500 million-a-year tax for the 
     benefit of private tort lawyers.
       That's the amount the tobacco companies agreed to pay in 
     ``fees'' to private attorneys appointed by the state 
     politicos on contingency. Four years later, an itinerant 
     panel of three ``arbitrators'' is still moving from state to 
     state to decide how this revenue stream, roughly a present 
     value of $8 billion, will be divvied up.
       Texas was crucial to starting the landslide toward a 
     national settlement, and Mr. Morales selected the five 
     lawyers who handled the state's case and would eventually 
     receive an astounding $3.3 billion in fees. How these five 
     were picked, though no part of last week's indictment, is an 
     untold story in itself. Houston lawyer Joe Jamail, who waved 
     off a chance to participate, told a grand jury Mr. Morales 
     had demanded a $1 million gratuity to be named to the case.
       Never mind. A million bucks would soon appear a hilariously 
     trivial sum compared to the monumental fees the tobacco 
     lawyers would receive. Seeing the sums that were up for grabs 
     after the settlement was reached, Mr. Morales produced out of 
     the blue a friend, lawyer Marc Murr, whom he claimed was 
     entitled to $520 million. Mr. Morales even turned up a 
     document, never seen before, testifying to a fee agreement.
       The five private lawyers were apoplectic, insisting Mr. 
     Murr had done little work and implying the contract was a 
     forgery. Mr. Morales quickly retreated. He did not seek a 
     third term as attorney general.
       The Murr episode had not been forgotten, however, and last 
     week the U.S. Attorney's office in Austin brought charges 
     against Mr. Morales for making false statements and 
     concealing documents in an effort to enrich his friend. Mr. 
     Murr was also indicted.
       Hallelujah. We can only hope this proves a sideshow to the 
     main event. Mr. Jamail's allegations about how Mr. Morales 
     picked the other five attorneys reportedly have been seconded 
     by two other witnesses before a grand jury. Virtually 
     overlooked has been the role of lawyer Walter Umphrey, one of 
     the biggest beneficiaries of the tobacco settlement, in 
     naming the supposedly ``independent'' chairman of the 
     national arbitration panel that is still awarding millions of 
     dollars in fees.
       A shameful episode, the tobacco settlement essentially 
     enacted a national sales tax outside any legislature and 
     awarded a big chunk of the proceeds to private campaign 
     contributors of the attorneys general who brought the suit. 
     So vast have been the rewards, in publicity and money, that 
     the AGs have now turned themselves into full-time buccaneers-
     in-arms of the private tort bar, preying on one industry 
     after another in search of more such triumphs.
       Belated accountability is better than none. We just hope 
     prosecutors and grand juries won't stop with the Murr case.
                                  ____

  Mr. CORNYN. Mr. President, I am pleased to join my colleague, Senator 
Kyl, to introduce today this landmark legislation to clean up our civil 
justice system. This legislation would enact a badly needed reform to 
the way in which attorneys are paid in some of the Nation's largest 
cases. It is designed to address some of the worst abuses of our civil 
justice system that I have witnessed in my nearly thirty years in the 
legal profession as a lawyer in private practice, as a state trial and 
appellate judge, and as state attorney general.
  This legislation, the Intermediate Sanctions Compensatory Revenue 
Adjustment Act of 2003, ISCRAA, will combat the gross abuse of attorney 
contingent fee agreements, abuses which we have been witnessing at an 
increasing rate in recent years. The legislation will enforce 
attorneys' fiduciary duties to their clients in a small but important 
category of cases--those resulting in judgments greater than $100 
million.
  Contingent fee agreements can have an important role to play in our 
civil justice system. Sometimes, when people are injured but cannot 
afford to hire lawyers out of their own pockets, attorneys will accept 
the case with the expectation that, if their clients prevail, the 
attorney will be paid for his or her services out of the judgment or 
settlement that the attorney is able to secure for the client. Such 
agreements between attorneys and their clients are called contingent 
fee agreements, because the attorney's fee is contingent on the client 
obtaining a money judgment or settlement. Contingent fee agreements, 
properly understood and utilized, reward attorneys for their work in 
obtaining monetary recovery for their clients, and the risk that they 
take that, despite their hard work and best efforts, they are unable to 
obtain any recovery for the client at all.
  Contingent fees can thus help ensure that plaintiffs with legitimate 
claims have the opportunity to obtain justice from our courts through 
the assistance of counsel. But contingent fees also present serious 
ethical problems for our legal system--particularly in cases in which 
the dollar amounts at stake are extraordinary, and result in a 
contingent fee award that overwhelmingly exceeds the relatively light 
or even negligible effort and risk actually undertaken by the 
attorneys.
  Under the time-tested traditions of our legal system, clients hire 
attorneys with the understanding and expectation that the attorney is 
ethically, legally, and morally obliged to represent their best 
interests, and that the attorney will use his or her legal skills in 
order to produce the best possible result--not for the attorney, but 
for the client.
  Thus, as my colleague has noted, contingent fee agreements are no 
ordinary agreements between consumers and businesses. It is a bedrock 
principle and well-established tenet of our Anglo-American system of 
justice that attorneys are not ordinary businessmen who can engage in 
hard bargaining with their customers, as courts have made clear on 
countless occasions. Rather, attorneys are officers of the court who 
bear a fiduciary duty to their clients. As fiduciaries, attorneys 
occupy a position of trust in their dealings with their clients, a 
trust which attorneys may not lawfully abuse.
  One obligation that flows from this status as a fiduciary is the 
attorney's obligation not to charge an unreasonable or excessive fee. 
This obligation is a fundamental part of an attorney's ethical duties, 
universally recognized in the ethics rules of all 50 States. Courts 
have made clear, time and time again, that every attorney fee contract 
automatically and necessarily includes the requirement that the fee be 
a reasonable one, a fundamental and basic duty of all attorneys, and 
one that no provision of such agreements may abrogate.
  ISCRAA affirms and reinforces the longstanding substantive law of 
attorneys' fiduciary duties, by providing a special mechanism to 
enforce those duties in a particularly high risk category of cases--a 
category that the courts themselves have singled out as posing special 
risks of unethical, windfall fees. Courts have noted that allowing 
standard contingency fee agreements in cases involving judgments of

[[Page S5245]]

$100 million or more have a distinct tendency of grossly 
overcompensating attorneys for their actual services rendered.
  ISCRAA prevents attorneys from evading their obligation to charge a 
reasonable fee in extraordinarily large recovery cases, by effectively 
limiting awards to a generous multiple of reasonable hourly fees. State 
courts, Federal courts, and even trial lawyers' themselves have all 
recognized that a reasonable fee must be proportional to the attorney's 
actual efforts. ISCRAA codifies and enforces this principle, while 
continuing to guarantee lawyers ample and generous compensation for 
their efforts--using fee multipliers that are as generous as the most 
liberal limits adopted by state courts, and which are considerably more 
generous than the limits set by federal courts in $100 million cases.
  This legislation thus promises to clean up our civil justice system 
and to repudiate the grossest abuses of our legal system. Make no 
mistake: Although all attorneys are supposed to uphold a strict ethical 
code, under which they are strictly forbidden from charging their 
clients unreasonable or excessive attorney fees, the temptation to 
abuse contingent fee agreements is a strong one, and even more so when 
the dollar amounts are truly extraordinary--such as in the $100 million 
cases that would be covered by this legislation. And make no mistake: 
the victim of such attorney fee abuse, and the beneficiary of this 
legislation, is not the defendant who pays the judgment--after all, the 
defendant pays the same total amount whether the money goes to the 
attorney or to the client. Rather, the real victim of this abuse, and 
the real beneficiary of this legislation, is the injured client, whose 
money is being taken away from the lawyer through an abusive contingent 
fee arrangement.
  As my colleague has also noted, ISCRAA is unquestionably an 
appropriate exercise of Congress's power to regulate and protect 
interstate commerce, considering the large size of the litigations to 
which it applies. $100 million is a standard threshold used by the 
federal government to determine whether an economic transaction 
significantly affects interstate commerce.

  But the most important reason for federal intervention in this area I 
have not yet mentioned, and I would like to take a moment to discuss it 
here: the gross abuses that we have already witnessed in large 
litigation fee awards. Recent experience amply demonstrates that, if 
the Federal Government does not act to prevent unethical and grossly 
abusive fee awards in massive, nationwide lawsuits, no one will. 
Moreover, recent experience further demonstrates that unreasonable fee 
payments in such suits threaten not just the attorneys' fiduciary 
obligations; they also place at risk the integrity of our governmental 
institutions. The unwholesome incentives created by windfall, unethical 
fee awards in large-scale litigations have induced some public 
officials to abandon their civic obligations.
  The textbook example of the types of abuses that make ISCRAA 
necessary is the attorney fee arrangement awarded in the State lawsuits 
to recover tobacco-related Medicaid expenses. Individual law firms that 
represented the States in that litigation have been given hundreds of 
millions and sometimes even billions of dollars in fees. To date, 
approximately $15 billion in fees has been awarded to the tobacco 
settlement lawyers, to be paid out in $500-million-a-year increments. 
Attorneys representing just three of the States--Mississippi, Texas, 
and Florida--were awarded $8.2 billion in fees. In many cases, such 
fees were paid to attorneys who filed duplicate, copycat lawsuits at a 
time when settlement negotiations had already begun and the risk that 
the states would not recover any money was negligible. Yet these 
lawyers nevertheless received massive contingency fees, for suits that 
involved no real contingency. And for most of the tobacco settlement 
lawyers, the size of the fee awards bears no reasonable relation to the 
actual effort expended or risk involved.
  There is widespread agreement that the fees awarded in the tobacco 
settlement are excessive and unreasonable. Perhaps the most damning 
indictments come from those who took the plaintiffs' side in this 
litigation--including from plaintiff lawyers themselves. For example, 
Michael Ciresi, a pioneer in the tobacco litigation who represented the 
state of Minnesota in its lawsuit, and who is no doubt familiar with 
what these lawsuits actually require, has said that the Texas, Florida, 
and Mississippi lawyers' fee awards ``are far in excess of these 
lawyers' contribution to any of the state results.'' Similarly, former 
Food and Drug Administration Commissioner David Kessler, another leader 
in the fight against tobacco, has said that the states' private lawyers 
``did a real service, but I think the fee is outrageous. All the legal 
fees are out control.'' Washington, D.C. lawyer and tobacco-industry 
opponent John Coale has denounced the fee awards as ``beyond human 
comprehension'' and stated that ``the work does not justify them.'' 
Even the Association of American Trial Lawyers, the nation's premier 
representative of the plaintiffs bar, has condemned attorney fees 
requested in the state tobacco settlement. The President of ATLA has 
noted: ``Common sense suggests that a one billion dollar fee is 
excessive and unreasonable and certainly should invite the scrutiny, of 
the courts. ATLA generally refrains from expressing an institutional 
opinion regarding a particular fee in a particular case, but we have a 
strong negative reaction to reports that at least one attorney on 
behalf of the plaintiffs in the Florida case is seeking a fee in excess 
of one billion dollars.''
  This letter, written in 1997, only concerned one of the Florida 
lawyers' request for attorney fees. Ultimately, Florida's private 
counsel was awarded a total of $3.4 billion in fees. These statements 
demonstrate beyond all doubt that there is real abuse going on here, 
and that the victim of this abuse is the client, the plaintiff--and not 
the defendant.
  Perhaps the best gloss on the tobacco fee awards is that provided by 
Professor Lester Brickman, a professor of law at Cardozo Law School and 
noted authority on legal ethics and attorney fees. Professor Brickman 
has stated:
  ``Under the rules of legal ethics, promulgated partly as a 
justification for the legal profession's self-governance, fees cannot 
be `clearly excessive.' Indeed, that standard has now been superseded 
in most States by an even more rigorous standard: fees have to be 
`reasonable.' Are these fees, which in many cases amount to effective 
hourly rates of return of tens of thousands--and even hundreds of 
thousands--of dollars an hour, reasonable? I think to ask the question 
is to answer it.''
  The attorney fees awarded in the state tobacco settlement are simply 
indefensible. And the process by which the fees were awarded partly 
explains how they came to be so. Outside counsel fees were determined 
by a private arbitration panel established by the Master Settlement 
Agreement, MSA, that resolved 46 of the states' litigation. Four other 
states had settled their suits earlier. Their lawyers, however, also 
were paid out of the accounts created by the MSA. Amazingly, the 
settlement agreement explicitly immunized all fee awards from judicial 
review. Even more amazingly, one of the three arbitrators who made the 
awards had a clear conflict of interests: he was the father of a South 
Carolina lawyer whose law firm has received the largest fee awards of 
all, believed to amount to over $2 billion. Another one of the 
arbitrators had no background in fee arbitrations or any related 
matter, and simply ignored the law in order to make outrageous awards, 
using the salaries of sports stars and entertainers as a basis of 
measure. Revealingly, the third arbitrator, a retired Federal judge 
appointed by President Carter, dissented from the key fee decisions.
  As incredible as the MSA fee awards and the arbitration procedures 
may seem, even more dubious is the process by which many of the law 
firms that participated in this lucrative litigation were selected in 
the first place to represent the states.
  In my home State of Texas, trial lawyers have accused the then-state 
attorney general of demanding $1 million in campaign contributions in 
exchange for their being hired to represent the state in the tobacco 
litigation. One prominent lawyer--a former president of the Texas Trial 
Lawyers Association--has since said that the attorney general's 
solicitation was so blatant that ``I knew th[at] instant . . . that I

[[Page S5246]]

could not be involved in the matter.'' He even later wondered if the 
meeting had been a ``sting operation.'' Another lawyer simply 
characterized his encounter with the attorney general as a bribery 
solicitation.
  This former Texas attorney general was recently indicted on Federal 
charges of attempting to fraudulently divert $260 million in tobacco-
settlement legal fees to one of his personal friends. He had given a 
sworn affidavit that this lawyer had served as Texas' ``primary 
adviser'' in its tobacco lawsuit--despite the apparent fact that the 
lawyer had attended no court hearings, depositions, or strategy 
meetings, wrote no memos or legal briefs about the case, and apparently 
never even spoke to any of the other attorneys. The attorney general 
even went so far as to forge and fraudulently backdate documents in 
order to win his friend a share of the tobacco settlement fee.

  As for the five law firms that actually did represent Texas in the 
tobacco litigation, they filed relatively late lawsuits that were based 
on other lawyers' work--and yet, despite the minimal energy expended on 
those suits, were awarded $3.3 billion in attorney fees. This award 
amounts to compensation that, even assuming that the attorneys worked 
all day every day during the entire period of the litigation, remains 
well in excess of $100,000 an hour. As one newspaper editorial has 
noted, for the amount of money that these lawyers were awarded, Texas 
could hire 10,000 additional teachers or policemen for ten years. 
Instead, four of these firms gave the attorney general $150,000 in 
campaign contributions in recent years.
  Texas' experience is not an isolated example. In other states as 
well, lawyers' participation in the tobacco litigation appears to have 
been the product of political favoritism--and to have resulted in 
unfathomable fees that bear no reasonable relation to the services 
provided. For example: New Jersey: The private in-state lawyers who 
represented this state in the tobacco litigation have admitted that 
they had no mass-tort litigation experience and played no role in the 
state settlement talks. They have also admitted that all the key work 
in the state's lawsuit was done by out-of-state firms--the in-state 
firms' principal work was drafting pro hac vice motions to have these 
outside lawyers admitted in New Jersey courts. Any work that the New 
Jersey lawyers did was submitted to the outside lawyers, who made all 
of the substantive arguments. Result: these in-state lawyers were 
awarded $350 million in the MSA fee arbitration. Connections: the New 
Jersey lawyers were an inside group of past presidents of the New 
Jersey trial lawyers' association. The State refused to even consider 
hiring a nonprofit firm to conduct the New Jersey lawsuit.
  Pennsylvania: Settlement talks had already begun, the states' tobacco 
litigation was being resolved, and all of the legal theories already 
had been developed long before the Pennsylvania state suit was filed. 
Result: Pennsylvania's private lawyers were awarded $50 million in the 
MSA arbitration--equivalent to 1000 percent of a reasonable hourly 
rate. As one expert has noted, ``there's not $50 million of work in 
there.'' Connections: the two law firms that the state Attorney General 
selected to conduct the litigation were among his top campaign 
contributors. The firms were awarded no-bid contracts. As one 
Pennsylvania commentator has noted, ``obviously, it was a political 
kind of thing.''
  Maryland: Billionaire tort lawyer Peter Angelos demanded a one 
billion dollar fee for his work on that State's case, even though, 
according to the State Senate President, the State legislature had 
retroactively ``changed centuries of precedent to ensure [Angelos] a 
win in the case.'' Angelos ultimately received an accelerated $150 
million payment for this no-risk lawsuit.
  Louisiana: The private law firms that represented the State in the 
tobacco litigation were awarded $575 million. The MSA arbitration panel 
actually increased this award on the ground that the State government--
the lawyers' supposed client--was opposed to suing tobacco companies. 
The Louisiana fee award amounts to almost $7,000 an hour, based on the 
lawyers' estimate that they worked a total 85,000 hours. Moreover, this 
estimate is unverifiable, because the state's private lawyers kept no 
billing records--as the attorney general explained, ``I wasn't that big 
on hourly or written reports.'' The dissenting member of the 
arbitration panel simply noted that the Louisiana fee award ``shocks 
the conscience'' The single biggest beneficiary of this largesse--
receiving $115 million in attorney fees--was a law firm based in Lake 
Charles, the hometown of the state's attorney general. This firm and 
the next largest fee recipient had donated over $42,000 to the attorney 
general's political campaigns. Together, all of the firms that 
represented Louisiana gave more than $100,000 to the attorney general 
in the years before they were selected to participate in the state's 
tobacco team.
  Ohio: The lawyers representing this State received fees estimated to 
exceed $50,000 per hour, despite the fact that, according to 
independent observers, ``all of the legal issues were resolved long 
before these Ohio lawyers stepped up to the plate.'' The state's 
outside counsel had donated $26,000 in campaign contributions to the 
State attorney general prior to their appointment to the state's 
tobacco team. After the attorney general chose one private lawyer to 
serve as the state's ``lead special counsel,'' that lawyer hired one of 
the attorney general's top aides for an undisclosed sum in order to--in 
the lawyer's own words--``help me get acquainted with a technique 
called PowerPoint.'' When told that ``there were many people in Ohio 
capable of doing a PowerPoint presentation,'' the state's outside 
counsel responded that this particular attorney general's aide ``was 
the only one I knew of.''
  Massachusetts: According to other tobacco plaintiffs' lawyers, 
Massachusetts's suit piggybacked on the work of other lawyers and was 
not pivotal to the outcome of the tobacco litigation. Result: $775 
million was awarded to the Massachusetts lawyers in the MSA 
arbitration.
  New York: When this State's then-attorney general hired private 
counsel to represent the State in its tobacco lawsuit, tobacco 
companies already had paid $15 billion to Florida and Mississippi for 
identical claims and a national settlement agreement already was under 
discussion. As one local anti-tobacco leader has noted, ``these were 
copycat lawsuits, there wasn't all that much work to do.'' The firms' 
primary job was to collect New York-specific data in order to calculate 
damages. Ultimately, the New York firms represented the State for just 
13 months. And they received a fee award of $625 million. This amounts 
to at least $14,000 an hour, for a lawsuit that by all accounts 
involved no risk. The dissenting member of the arbitration panel has 
denounced the award as ``an astronomical sum unrelated to, the 
attorneys', efforts or achievements.'' The New York firms had 
contributed more than $250,000 to New York politicians and their 
campaign organizations in the years preceding their selection - and 
another $200,000 after the State settlement.
  Wisconsin: The Wisconsin lawyers' tobacco litigation work has been 
described as chiefly consisting of media and public relations efforts 
on their own behalf. Their billing records included time spent 
selecting office space and buying furniture. One lawyer effectively 
billed $3,000 to the State for reading an article in a Madison 
newspaper. The lawyers also billed the State for limousine rides around 
the state, trips on private jets, and stays at luxury hotels. Result: 
$75 million was awarded to the Wisconsin lawyers. Based on the law 
firms' records of the total number of hours they devoted to the case--
including work by paralegals--this fee amounts to $3,000 per hour.
  Missouri: A State supreme court justice in Missouri resigned his post 
in order to join one of the private law firms expected to receive a 
portion of the MSA arbitrators' fee award. Ultimately, the firms 
representing the State spent just 5 months on the state's lawsuit. They 
received a fee award of $111 million. One State leader has described 
the award as ``the biggest rip-off in the 180-year history of the 
state.'' The law firms receiving these fees had donated more than 
$500,000 to State politicians and parties in the years leading up to 
their selection as the State's outside counsel.

[[Page S5247]]

  These examples are too numerous to dismiss. In State after State, the 
temptations created by the massive, windfall fees awarded in the 
Medicaid tobacco settlement corrupted not only lawyers involved, but 
the government as well. The fee awards poisoned everything that they 
touched. No one who examines these events closely--who surveys the 
obscene fee awards, and the political cronyism that determined who 
benefited--can disagree that this must never be allowed to happen 
again.
  As a final point, I would like to address a question that has been 
raised with regard to remedy. Some have argued that nothing can be done 
to correct the excesses of the tobacco settlement fee awards--even with 
regard to fees that are still being or have yet to be paid. On several 
occasions, State judges who were called upon to approve their State's 
tobacco settlement have also, on their own initiative, inquired into 
the apparent unreasonableness of the fees awarded. In each case, both 
the plaintiffs' lawyers--and in some cases, even State officials--have 
challenged the State courts' authority to act. They have argued that 
these courts lack jurisdiction to review a national settlement, and 
that excessive fees cannot be restored to the State. One state's 
attorney general implicated in these events has argued that it is a 
``misconception'' that the tobacco settlement ``attorneys' fees are 
coming out of the public's pocket. That is not the case. They [sic] 
defendants have agreed to pay these fees.''
  Because of the way that the MSA fee payments are structured, no 
lawyer's award comes out of any one particular, identifiable State's 
recovery. Instead, all of the lawyers are being paid from one of two 
separate accounts, each of which is funded by the tobacco companies.
  It is a mistake, however, to contend that, because the MSA fee 
payments are made directly from defendants to plaintiffs' lawyers--
without ever formally or actually passing through the plaintiffs' 
hands--they are immunized against ethical scrutiny or correction. It is 
well and long established in our law that fee awards originate as the 
property of the client regardless of how the fee agreements are 
structured. The courts have been very clear on this point. As they have 
stated: ``The allowance of attorney fees in a judgment gives the 
attorneys no interest and ownership in the judgment to the extent of 
the amount of the fee allowed, but the judgment in its entirety is the 
property of the client. The award for fees is for the client, not the 
attorney.''
  ``[A]ttorneys' fee provisions exist for the benefit of parties and 
not the attorneys. . . . Several jurisdictions have noted that the real 
party in interest with regard to fees is the client and not the 
attorney.''
  ``A judgment for costs is a judgment in favor of the party, and not 
of his attorney, and the money represented by the costs is the property 
of the party.''
  ``[T]he award of attorney fees [is] made not to the attorneys but to 
the litigant who was personally liable to the attorneys. This is also 
the view in other states when the courts award attorney fees.''
  ``An award of attorney's fees belongs to the client and not the 
attorney.''
  Indeed, an award of attorney fees is generally taxable as income to 
the client. In a recent case, the U.S. Court of Appeals for the Ninth 
Circuit noted that a plaintiff's obligation to compensate the law firm 
that represented him ``was satisfied by [the defendant]. The payment 
was therefore to [the client]. The discharge by a third person of an 
obligation to him is equivalent to receipt by the person taxed.'' The 
Ninth Circuit emphasized that the fact ``[t]hat [the client] never laid 
hands on the money paid to the lawyers does not obliterate their 
constructive receipt.'' In other words, the fee award belongs to the 
client, regardless of how the award is made.
  The rule that fee awards belong to the client is strongly supported 
by important policy considerations. It is necessary because any other 
rule would be an invitation to collusion and self-dealing between 
plaintiffs' lawyers and defendants. Again, the courts have been very 
clear on this point. As the Third Circuit has noted: ``[A] defendant is 
interested only in disposing of the total claims asserted against it, 
and the allocation between the [plaintiff's] payment and the attorneys' 
fees is of little or no interest to the defense. Moreover, the 
divergence in class members' and class counsel's financial incentives 
creates the danger that the lawyers might urge a class settlement at a 
low figure or on a less-than-optimal basis in exchange for red-carpet 
treatment for fees.''
  The Second Circuit has made the same point, noting: ``Defendants, 
once the settlement amount has been agreed to, have little interest in 
how it is distributed and thus no incentive to oppose the [attorneys] 
fee. Indeed, the same dynamic creates incentives for collusion--the 
temptation for lawyers to agree to a less than optimal settlement in 
exchange for [generous fees].''
  The Ninth Circuit has also addressed the question of ``whether a 
class member has standing to appeal class counsel's attorney fee and 
cost award when that award is payable by the defendant independently, 
and not out of the class settlement.'' The court concluded that 
``[e]ven if class counsel's attorney fees are not to be paid from the 
class settlement . . . , the aggregate amount of the attorney fees and 
the class settlement payments may be viewed as ``a constructive common 
fund.'' The court reasoned that ``[i]f . . . class counsel agreed to 
accept excessive fees and costs to the detriment of class plaintiffs, 
then class counsel breached their fiduciary duty to the class. If that 
were the case, any excessive award could be considered property of the 
class plaintiffs, and any injury they suffered could be at least 
partially redressed by allocating to them a portion of that award.''
  As several commentators have noted, the policy considerations 
underpinning the rule that fee awards belong to the client apply with 
full force to the State tobacco settlement. Indeed, that settlement 
could serve as a textbook example for why this rule exists. As 
Professor Brickman has noted: ``To the tobacco companies, dollars are 
dollars, whether paid to States or paid to lawyers. So the real amount 
on the bargaining table was not the $246 billion that the states 
settled for, but a larger sum, including the amount to be paid to the 
attorneys. . . . Stated simply, because dollars are fungible, the fees 
are coming out of the settlements.''
  Even foreign commentators have noted that the State tobacco 
settlement's ``arbitration is a mere figleaf. The money going to the 
lawyers was clearly part of the overall amount that the tobacco 
companies were willing to pay to settle the case. Whatever the lawyers 
get, the states do not.''
  And this point has not been lost upon members of Congress. 
Representative Chris Cox, R-CA, has testified on the matter: ``It is 
specious to argue that, billions of dollars, in fees are not being 
diverted out of funds available for public health and taxpayers. The 
tobacco industry is willing to pay a certain sum to get rid of these 
cases. That sum is the total cost of the payment to the plaintiffs and 
their lawyers. It is a matter of indifference to the industry how that 
sum is divided--75 percent for the plaintiffs and 25 percent for their 
lawyers, or vice versa. That means that every penny paid to the 
plaintiffs' lawyers--whether it is technically ``in'' the settlement or 
not--is money that the industry could have paid to the state or the 
private plaintiffs. Excessive attorneys' fees in this case will not be 
a victimless crime.''
  These authorities and their reasoning should be more than sufficient 
to permanently dispel the notion that an attorney fee agreement can be 
structured so as to evade the ethical obligation to charge only a 
reasonable fee. The defenders of the MSA fee payments are simply 
misleading the public and this distinguished body when they assert that 
a particular lawyer's award under the settlement does not come out of a 
particular state's recovery. That fee comes out of all of the State's 
recoveries. All excessive or unreasonable fees should be restored to 
all 50 of the States.
  Senator Kyl has already presented estimates of the monetary recovery 
each State can expect if ISCRAA is enacted. I would simply point out 
here that, according to those estimates, Texas has been charged 
excessive and unreasonable attorney fees in the amount of $667 million, 
and therefore would recover those funds if this legislation is adopted.
  ISCRAA's return of unethical tobacco-settlement fee awards to the

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states is manifestly proper in light of the fact that all fee awards 
are the property of the client, and the attorney is entitled only to a 
reasonable fee. No attorney is above these ethical rules and 
obligations. They cannot be waived or ignored. And in light of our 
experience with the State tobacco settlement fee awards, and their 
effect on our public officials, these ethical duties must be carried 
out and enforced strictly and fully.
  Our Federal and State courts generally do a good job of protecting 
consumers and enforcing the rights of all Americans. But there are 
problems in our courts that require attention and significant reform. 
Class action abuse not only threatens the integrity and the perception 
of rationality in our nation's courts, it also strongly hinders 
economic and job growth. Tort reform is badly needed to rescue many 
industries, especially our health care industry, from abuses of our 
legal system. The judicial confirmation process at the federal level 
has become bitter, severe and destructive, and that broken process 
poses a serious threat to judicial independence and the quality and 
efficiency of our courts. And abusive attorney fee arrangements make a 
mockery of our civil justice system, all while enriching a small band 
of unscrupulous litigators at the expense of the real victims, their 
clients.
  To enforce the longstanding fiduciary duty of all attorneys to charge 
only a reasonable fee, in a class of cases that poses heightened risks 
of abuse and special significance to the national economy, I urge that 
this Senate consider expediently, and approve quickly, this important 
measure, the Intermediate Sanctions Compensatory Revenue Adjustment Act 
of 2003.

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