Blue-collar factory jobs and assembly line jobs are not the only American jobs being sent over seas. Lawyers are out-sourcing legal jobs overseas also.
Mark Alexander, a Dallas attorney, says he's ethically obligated to do what's best for his clients, "and that includes saving them money." So when one of them asks him to research a securities-fraud topic, for example, or breach of contract, he doesn't even think about applying his $395 hourly rate. Instead, he calls Atlas Legal Research, an outsourcing company based in Irving, Texas, that uses lawyers in India to provide the service for $60 per hr. "When a client pays me a $25,000 retainer and I can save them money, I will do so," says Alexander. Handing off the work to a $225-per-hr. junior associate is not an option. "They don't even know where to stand in the courtroom," he says.
While the Americans learn, well-trained lawyers in secure offices in Mumbai (formerly Bombay), Bangalore and Gurgaon (outside Delhi), who typically earn $6,000 to $30,000 annually, do legal grunt work. Alexander's sentiments may explain why outsourcing is blossoming in the legal profession, which is known--and often despised--for its high prices. Law-firm partners bill at a national average of $318 per hr. and at $550 per hr. at large New York City firms, according to a 2007 survey by Altman Weil, a legal-consulting company. Starting salaries for attorneys at some large firms now stand at $160,000. So a U.S. company's simple problem can generate hundreds of thousands of dollars in fees.
The considerable savings is perhaps one reason Forrester Research, based in Cambridge, Mass., has projected the offshoring of 29,000 legal jobs by the end of 2008 and as many as 79,000 by 2015. It's part of India's inevitable move up the corporate food chain, from lower-value business process outsourcing--like call centers--to knowledge process outsourcing (KPO). The latter category encompasses higher-skilled jobs, such as engineering and medicine, and relies on the KPOs to behave more like branch offices of U.S. companies.
ValueNotes, a business-research firm based in Pune, India, says a subset of KPO called legal process outsourcing (LPO) has grown revenues 49% from 2006, to $218 million last year. The figure will nearly triple, to $640 million, by 2010, it says. ValueNotes counts more than 100 legal-services providers in India, ranging from a handful of overseas corporate legal offices, such as Oracle's and General Electric's, to companies that contract to provide low-cost legal services to U.S. and British businesses. Leaders include Integreon and LawScribe, both in Los Angeles, and New York--based Pangea3.
Persuading lawyers to export work wasn't an easy sell, says Ganesh Natarjan, CEO of seven-year-old Mindcrest, which has its headquarters in Chicago and employs 440 lawyers in Mumbai and Pune. "Lawyers are a risk-averse group, so it was a slow process for them to adopt the idea," says George Heffernan, vice president and general counsel. Mindcrest's services include document review, research and support for compliance functions. The last cost large companies an average of $2.9 million each in 2006, according to Financial Executives International in Florham Park, N.J.
Educating American lawyers about India's English-speaking attorneys, who are trained in a common-law system modeled on Britain's, helped change attitudes, at least among top lawyers for U.S. companies, Heffernan says. About 75% of Mindcrest's clients are FORTUNE 500 companies. Mindcrest hired 390 lawyers last year alone, a staff increase mandated by clients with some large-scale projects, it says.
But outsourcing worries some experts because the ethical rules that bind U.S. attorneys have no force in India. "Lawyers are being seduced by the business end of outsourcing and are not being concerned enough with the ethical issues it's raising. I'm deeply troubled that outsourcing companies do not understand the scope of a lawyer's duty to confidentiality, nor are they familiar with conflict-of-interest rules," says Mary C. Daly, dean of St. John's University School of Law in New York City.
LPO firms say they are up to the task of security and confidentiality. At Integreon's facilities in Mumbai and Gurgaon, for example, guards search attorneys' belongings to ensure they're not carrying flash drives or laptops, according to CEO Liam Brown. Computers don't have disc drives, usable usb ports or CD burners, and most can't print. Attorneys work for a specific client in areas called dedicated delivery centers, which are accessible via a fingerprint scan and monitored by cameras. Each room can hold up to 36 terminals--many of them with dual screens. The company never stores data locally. Rather, the lawyers work directly on the client's server and only over a secure line or via the Internet. The space becomes a "virtual extension of the company we're working for," says Abhishek Khare, head of the Gurgaon office.
Changes in litigation procedures are boosting momentum in the LPO trade. Amendments to federal rules require parties to share electronic documents, such as e-mail and Microsoft Office files. That typically means both sides must review thousands of documents to prevent the inadvertent disclosure of confidential information to the other party. The service costs about $1 per page in India but can range from $7 to $10 per page in the U.S. "Some clients don't want to spend that much, especially if they don't even know how much their damages could be," says Conrad Jacoby, owner of efficientEDD, a legal-technology consultancy in Dunn Loring, Va.
TransUnion, in Chicago, has successfully outsourced legal work for four years, according to general counsel John W. Blenke. "Every law firm is really an outsourcer. One lawyer usually can't do it all," he says. Indian attorneys are currently reviewing more than a million litigation e-mails for the company, which costs less than $10 per hr., he says. He would pay $60 to $85 per hr. to a U.S.-based legal-staffing company for the job. Blenke says he's cautious, however, about the work he outsources. "You can only do it with a few things. It has to be an area that you know well, so you can build processes around that," he says.
DuPont saved $500,000 in 2006 by outsourcing paralegal work to Chicago's RR Donnelley, which uses facilities in India and the Philippines to review documents for the chemical giant, says Thomas Sager, DuPont's chief litigation counsel. "There's been some internal resistance, and from the outside too, about working with providers thousands of miles away. But geographic separation is now a fact of life," says Sager.
Showing posts with label SuperLawyers.. Show all posts
Showing posts with label SuperLawyers.. Show all posts
Friday, April 25, 2008
Monday, March 10, 2008
A Legal Giant Has Fallen, The Man Who Tamed Big Tabocco.
The legend of Richard Scruggs is by now well-known. His fame took root in the 1990s, when he won settlements for shipyard workers in Pascagoula, Miss., who had been exposed to asbestos. It blossomed in 1998, when the former Navy fighter pilot pressured tobacco companies to agree to a $248 billion settlement. And, in recent months, his story descended into the realm of scandal when the 61-year-old Scruggs, his son David "Zach" Scruggs and three others were indicted in his hometown of Oxford, Miss., for trying to bribe a judge to get a favorable ruling in a fee dispute.
But the legend of Dickie Scruggs, as commonly told, generally omits a key fact. Scruggs' reputation as a giant killer of the plaintiffs bar is outdated. Even before the indictment his career was in decline. In the 10 years since the tobacco settlement, Scruggs has taken on a series of quixotic cases. These matters were much ballyhooed in the press, but in the end they shared two things: big enemies and bad results. The only major success he's seen in the last decade hasn't been for the underdog plaintiffs that he champions, but for a big corporation that he defended in a product liability case.
Scruggs' experience with tobacco, where the plaintiffs achieved what had once been thought impossible, may have left him with an unrealistic expectation of the power of the legal system to cure social ills, and perhaps an inflated view of his abilities. Befitting a man who tamed tobacco, he set hugely ambitious targets and goals. He tried to reform the health care industry, hold Wall Street responsible for subprime lending years before the mortgage crisis erupted and take on the insurance powerhouses after Hurricane Katrina. But in the end he was largely thwarted.
His lawyer, John Keker of San Francisco's Keker & Van Nest, maintains his client is innocent of the criminal charges. "There's no question he didn't know about any bribery scheme the way the government describes it," Keker says. He also notes that most plaintiffs lawyers incur their share of losses, and Scruggs is no different: "Ask any successful plaintiffs lawyer. That happens more often than not."
The tobacco settlement that made Scruggs so wealthy was in many ways an aberration. It was the first and so far the only time that plaintiffs lawyers had the clout of a small army of 46 state attorneys general behind them. In addition, one tobacco company, Liggett Group LLC, did the unthinkable and broke ranks, agreeing to cooperate with the plaintiffs. This unprecedented alliance pressured the biggest tobacco companies to negotiate.
Scruggs has never revealed how much he's earned from the tobacco settlement. A three-person arbitration panel awarded a host of plaintiffs lawyers more than $13 billion in fees, which the tobacco companies are paying over 20 years. As a pioneer of this litigation, Scruggs presumably received one of the largest chunks. After the settlement, he spent time in Tahiti and enjoyed his yachts, jets, fast cars and vacation homes. It was a life he likely never imagined during his childhood, when he was raised by a single mother who worked as a secretary in the Pascagoula shipyards. (His parents divorced when he was 6.) But, like many lawyers who don't have to work, he couldn't stop working. He seemed to believe that his tobacco wealth was coupled with a divine mandate to make the world a better place.
TAKING ON THE HMOs
After tobacco, Scruggs took aim at another populist villain, HMOs. He filed a class action RICO suit in October 1999 on behalf of up to 46 million patients who were members of six health maintenance organizations. He accused the defendents of falsely telling members that decisions about their treatment and coverage were based on medical necessity, when in fact cost-cutting guided these decisions. This litigation, he claimed, had "the power to dramatically improve the quality of health care throughout the nation." Scruggs outlined a multipronged attack: He expected institutional investors and Congress (where his brother-in-law Trent Lott was a senator) to fall in line and pressure HMOs to make sweeping changes. "We understand how to play this game now in ways that haven't been played before," he announced to Newsweek in 1999.
Scruggs enlisted some of his co-counsel from the tobacco crusade and hooked up with another famous lawyer, David Boies of Armonk, N.Y.-based Boies, Schiller & Flexner. But this star-studded assault fizzled. In 2002 Miami federal district court Judge Federico Moreno denied class certification. He reasoned that the patients' claims were too dissimilar because they had received so many differing representations from HMOs about the terms of their coverage. Scruggs and Boies proceeded with a few individual cases, but they recovered less than $250,000 in total settlements for a dozen individuals. And they didn't get a penny in attorney fees. "We got hammered," Scruggs candidly told The American Lawyer.
Instead, Scruggs could have filed a suit on behalf of doctors who contracted with HMOs. Joseph Langston, who worked with Scruggs on the HMO cases, explained to The American Lawyer in 2003 why they chose the patients: "We thought, frankly, the patients had the more compelling and emotional stories to tell." (Langston was indicted and in January pleaded guilty in a separate bribery case implicating Scruggs.) Meanwhile, a different group of lawyers moved forward with a RICO class action on behalf of 900,000 physicians. That group, led by Archie Lamb Jr. of Birmingham, got class certification from Judge Moreno and recouped settlements exceeding $2 billion.
GOING AFTER THE MORTGAGE COMPANIES
As the HMO suits were collapsing, Scruggs was pulled into another case with a sympathetic story line: low-income borrowers trying to fight Wall Street. Years earlier a group of plaintiffs lawyers had gone after First Alliance Mortgage Co., a subprime lender accused of charging excessive fees and engaging in fraud. Before Scruggs joined the litigation, in March 2002 the plaintiffs lawyers, the Federal Trade Commission and six attorneys general reached a $60 million settlement with the estate of the bankrupt First Alliance and its former chief executive officer. The plaintiffs then turned their sights on the deep pockets of Lehman Brothers Inc., which had loaned money to First Alliance and closely monitored its operations. Plaintiffs lawyer Sheila Canavan says she pleaded with Scruggs to help them. Scruggs was reluctant at first, recalls Canavan, a solo practitioner from Moab, Utah. "He said, 'I'm considering retiring. I'm mostly doing health care stuff.'"
Plus, Canavan says, Scruggs wanted to limit his workload and travel because he had undergone two back surgeries. Canavan says she swayed Scruggs by playing for him a tape of a woman describing how she had been deceived by a First Alliance loan officer. Scruggs changed his mind and joined the RICO suit filed on behalf of 4,500 borrowers in Santa Ana, Calif., federal court.
Helen Duncan, a partner at Fulbright & Jaworski who represented Lehman, says Scruggs and his team started with high hopes. "They wanted a billion dollars from us, but offered to settle for $500 million," she recalls. When Lehman tried to settle for a much smaller amount, Scruggs reportedly told the Lehman lawyers he could financially afford to see this case to the end. "God didn't give me all this money to settle," Scruggs said, according to Duncan.
Not all of Scruggs' co-counsel shared his optimism. "I did not feel there was the potential for a huge recovery [against Lehman]," says David Zlotnick of San Diego's Krause Kalfayan Benink & Slavens, who was part of the original team that sued First Alliance. Zlotnick believed the recovery would be severely limited by a provision in the First Alliance settlement. There, the plaintiffs agreed to limit their claims against Lehman to its proportionate share of fault, to the extent required by a 9th U.S Circuit Court of Appeals case. (In return, Lehman agreed to waive its objections to the settlement.) Zlotnick thought that this "bar order" would prevent them from getting much from Lehman.
Scruggs believed otherwise and approached the case like a tobacco-sized battle. "Scruggs came in with a whole crew of people," recalls Zlotnick. He enlisted friends from Mississippi, like John "Don" Barrett of The Barrett Law Office in Lexington, Miss., who has allied with Scruggs on many cases. Milberg Weiss and Lieff, Cabraser, Heimann & Bernstein also signed on. "They had a different style of litigating than I do," adds Zlotnick about the Mississippi contingent. "The Gulfstream style." (Scruggs and Barrett commuted to California on separate private jets.)
During the three-month trial in 2003, Scruggs couldn't outmaneuver the bar order. He argued that applying the order to intentional torts would violate public policy, but federal district court Judge David Carter disagreed. (In the midst of the trial, Carter did grant Scruggs' request for a break so that he could preside as King of Mardi Gras back home in Mississippi.)
The jury's verdict was technically a victory for Scruggs, but more bitter than sweet. The jury held Lehman liable for aiding and abetting First Alliance's fraudulent lending, and concluded that the plaintiffs had incurred $51 million in damages. But, following the judge's interpretation of the bar order, the jury found that Lehman was only 10 percent at fault for those damages, which trimmed the recovery to $5 million. Scruggs appealed to the Ninth Circuit without success. In December 2006 the appellate court remanded the case for a recalculation of damages that still would not have exceeded $5 million. At press time the plaintiffs had agreed to a $2 million settlement that is awaiting court approval.
The case has been a huge money drain for Scruggs' team. In their fee application, they are seeking only $1.5 million, even though they spent more than $9.3 million in time and costs. "It was a Pyrrhic victory," says co-counsel Daniel Mulligan of San Francisco's Jenkins Mulligan & Gabriel. "It was nice to win against Lehman Brothers, but the amount was definitely disappointing."
Over the years, Scruggs has attempted to paint himself as a different breed of plaintiffs lawyer, one who is more principled and discerning. He has criticized lawyers who rush to file securities lawsuits after a company's stock drops. "Those are piggyback cases, not primary kills," he told Chief Executive magazine in June 2002. "I try to take on companies that have successfully avoided liability but shouldn't have. I don't want to get there after the antelope has been brought down."
In addition to eschewing securities suits, Scruggs has also opted not to take a seat on the lucrative pharmaceutical litigation bandwagon. Scruggs, it seems, isn't eager to join a case where he can't be the leader. "I'm probably not the best person in the world to work with others on a coequal basis," Scruggs told The American Lawyer in 1996. "I like to make decisions and call the shots."
COURTING SULZER MEDICA
Scruggs' principles, however, haven't stopped him from jumping to the other side. In 2001 he offered his services to Sulzer Medica Ltd., a Swiss company deluged with suits after recalling 40,000 defective hip implants. Scruggs decided to aggressively pursue the assignment and repeatedly contacted the company's general counsel, David Wise, to set up meetings, according to Wise. The GC initially rejected the entreaties, until finally agreeing to listen to the lawyer's proposal. Scruggs could offer exceptional access to the plaintiffs attorneys, which included his Mississippi friend Barrett. After flying to Zurich to meet with Sulzer's board, Scruggs was hired.
"He brought to the table unique insight into and understanding of the mass tort plaintiffs bar [and] he was genuinely interested in helping to save the company," Wise explained in an e-mail to The American Lawyer. (Wise is now general counsel at Cyberonics Inc., Sulzer's successor.)
Scruggs described his services in a different way to the Dallas Morning News in 2001: "If you want to catch a thief, you have to hire a thief." Scruggs brought in plaintiffs lawyer Joseph Langston to assist. Scruggs and the plaintiffs lawyers ultimately reached a $1.1 billion settlement.
This corporate assignment would turn out to be Scruggs' most successful matter since the 1998 tobacco settlement. His fee was not tobacco-size, but it was generous. Sulzer paid Scruggs and Langston $5 million up front and a $20 million success fee, according to Daniel Becnel Jr., one of the plaintiffs lawyer in that case. Wise would not comment on the fee. Harvey Kaplan, a partner in Shook, Hardy & Bacon's Kansas City, Mo., office, who also represented Sulzer, offers the highest praise for Scruggs. "He was great," says Kaplan. "I found him to be creative, engaging and a gentleman." In the Chief Executive article, Scruggs explained his decision to side with Sulzer in altruistic terms: "They've been in business for 100-plus years, they make life-enhancing products, and they had one screwup. It's just another outlet for my idealism."
NEXT UP: NOT-FOR-PROFIT HOSPITALS AND WELDING INDUSTRY
Scruggs may bring the same idealism to his post-tobacco causes for plaintiffs, but they haven't fared as well. He has struggled in mass actions against not-for-profit hospitals and the welding industry.
Scruggs' battle against welding rod makers began in 2003, when he filed a case in New Orleans state court against Lincoln Electric Holdings Inc., General Electric Co. and others, alleging that the fumes from these rods cause neurological problems. More than 5,000 cases ended up as a multidistrict litigation, coordinated by Cleveland federal district court Judge Kathleen O'Malley, who appointed Scruggs and Barrett co-lead counsel. (More than 6,500 cases remained in state court.) Scruggs aligned himself with some of the country's best-known plaintiffs lawyers from the tobacco wars: Joseph Rice of South Carolina's Motley Rice; Walter Umphrey of Beaumont, Texas; Michael Papantonio, the name partner of Pensacola, Fla.'s, Levin, Papantonio, Thomas, Mitchell, Echsner & Proctor; and Richard Heimann of San Francisco.
The litigation looked promising at first. In October 2003 in a case outside the MDL not handled by Scruggs' group, a Madison County, Ill., jury awarded $1 million to a welder who claimed fumes caused his Parkinson's. "The Next Asbestos?" Forbes fretted in 2004. "I think we're talking aggregate damages way in excess of a billion dollars," said Scruggs' co-counsel John Climaco of Cleveland's Climaco, Lefkowitz, Peca, Wilcox & Garofoli in the Forbes article. The industry then settled the first Cleveland test case in 2005, paying more than $1.6 million.
But these defendants wouldn't follow the tobacco model. Instead of agreeing to a global settlement, they fought. They got an order requiring every plaintiff to detail his health claims. As a result of this and other defense motions, the federal caseload shrank to less than 1,700, according to Stephen Harburg, a Washington, D.C.-based partner at O'Melveny & Myers, which is the defendants' lead counsel. The claims of one test plaintiff set for trial collapsed when the defense secretly videotaped him acting much healthier than he claimed to be. Even plaintiffs lawyer Rice, who sat on the group's executive committee, eventually dropped out, opting to pursue fewer cases outside the MDL. "We wanted to take only cases we thought had more serious injuries," he says about the cases on Scruggs' docket.
"I think [the plaintiffs] thought they would overwhelm us with [cases], and if they could flood us with numbers early, we would buckle under the pressure," says O'Melveny's Harburg. Of the 18 cases that have gone to trial in state and federal court, the defendants have won 16. Still, the plaintiffs did get a lift at the end of last year, when a Cleveland federal jury ordered Lincoln Electric to pay $20.5 million to a former welder. Scruggs was not actively involved in that case, although a lawyer from his firm, David Shelton, assisted lead lawyer Climaco.
"We know they're tough cases," says Florida lawyer Papantonio. "Everybody had gone into this with their eyes open." Another co-counsel, however, grumbles about the costs of these cases. "[We've] lost more than we've won. Way more than we've won," says Becnel, who sits on the plaintiffs executive committee and says he has spent more than $1 million of his money on the cases.
Scruggs' attempt to reform the world of not-for-profit hospitals has foundered even more in the courtroom. In the summer of 2004 Scruggs started filing RICO suits against not-for-profit hospitals around the country, accusing them of violating their mandate to provide indigent care. The claims were made on behalf of uninsured patients who received huge hospital bills. The patients claimed standing as third-party beneficiaries of a contract between the hospitals and the federal government, a contract supposedly created by the hospitals' tax-exempt status. As usual, Scruggs' crusade attracted headlines, but the litigation sputtered. Every one of the cases has been dismissed on the pleadings. Most of the courts concluded that the plaintiffs have no standing. One judge lashed out at these actions. "Plaintiffs here have lost their way," wrote federal district court Judge Loretta Preska of the Southern District of New York. "They need to consult a map or a compass or a constitution, because plaintiffs have come to the judicial branch for relief that may only be granted in the legislative branch."
AND THEN THERE WAS KATRINA
Scruggs' string of professional disappointments was joined by a personal one. In August 2005 Hurricane Katrina damaged his house in Pascagoula and harmed hundreds of thousands of others in his home state. The situation was tailor-made for a Scruggs' attack: hordes of sympathetic plaintiffs versus unsympathetic insurance companies.
Scruggs responded by forming the Scruggs Katrina Group in September 2005 with Barrett and three other Mississippi firms. The next month they filed a test homeowner suit against Nationwide Mutual Insurance Co. on behalf of Paul and Julie Leonard, a Pascagoula police lieutenant and his wife. The Leonards' house was inundated with five feet of water, and the couple claimed damages exceeding $130,000. Nationwide paid them only $1,661, the portion that the insurer said was due solely to wind. The plaintiffs' policy covered wind damage but excluded flood damage, and Scruggs accused the insurer of undervaluing the wind damage. He also claimed that Nationwide should be liable for damage caused jointly by wind and water.
The case was tried without a jury by senior federal district court Judge L.T. Senter Jr. in Gulfport, Miss. After an eight-day trial, Scruggs failed to get much more for the Leonards. Judge Senter awarded them just $1,228 in additional recovery. The Leonards' damages were disappointing but Scruggs did win a key point that could help him in other cases. Senter invalidated language in the Nationwide policy that appeared to prevent any recovery for damage caused jointly by wind and water; he held that the language was ambiguous and could not be enforced. That victory was short-lived. In August 2007 the 5th Circuit reversed and held that the language was enforceable.
Before the 5th Circuit issued its opinion, Scruggs settled other cases against Nationwide for a confidential amount. Scruggs also settled a slew of suits he had brought against Allstate Property and Casualty Insurance Co. and State Farm Fire and Casualty Co. Inc. According to the Web site of the Katrina Litigation Group (which recently changed its name from the Scruggs Katrina Group) the group has settled 1,300 claims. As part of a settlement of 640 cases with State Farm, Scruggs and his co-counsel got $26.5 million in fees. The fee award prompted a suit by Scruggs' co-counsel, John Jones, who claimed Scruggs was denying him his portion of the fees. It was in this case that Scruggs is alleged to have bribed a Mississippi state court judge for a favorable ruling. Since his indictment, Scruggs has withdrawn from all Katrina litigation.
Scruggs' indictment has left many who know him astounded and perplexed. "The whole thing is a shock," says R. Eric Kennedy of Cleveland's Weisman, Kennedy & Berris, who has worked with Scruggs as a plaintiffs lawyer and has also dealt with Scruggs as an adversary. "He is the epitome of honesty and honor. He's a pretty stubborn guy about doing things the right way. ... He's never been close to the line. Not even close." Papantonio, who has worked besides Scruggs on several cases, finds it hard to believe that he would risk his livelihood for a dispute over fees that are paltry compared to his wealth. "Ten to 15 million dollars doesn't change his life," Papantonio says.
Even if Scruggs is exonerated, it may be hard for him to revive a career marked recently by good intentions and disappointing results.
— Richard "Dickie" Scruggs, whom the Associated Press has dubbed the “King of Torts”, pleaded guilty Friday, 14 March 2008, to conspiring to bribe a judge — a crime that could send him to prison and spell the end of his storied legal career. (Melvin M. Belli was the real King of Torts)
Federal prosecutors are asking for the maximum of five years behind bars for the 61-year-old Scruggs, the multimillionaire "King of Torts" who combined a shrewd legal mind and aw-shucks country-lawyer charm to extract billions of dollars from the tobacco and asbestos industries, among others.
He will also lose his license to practice law.
Scruggs and another lawyer in his firm, Sidney Backstrom, pleaded guilty to conspiracy to defraud for offering a $50,000 cash bribe to a Mississippi judge for a favorable ruling in a dispute over legal fees from a Hurricane Katrina insurance lawsuit.
In return for Scruggs' guilty plea, prosecutors will recommend that the judge drop several other counts against him, including fraud. No sentencing date was set during the hearing at the federal courthouse in Oxford.
Scruggs' son and law partner, Zach, also is charged in the case but did not enter a plea and is expected to go to trial.
For months, Scruggs appeared intent on fighting the charges, and many reporters who had closely followed the case were caught off-guard by the plea bargain. Scruggs folded after two of his co-defendants turned on him, one of them secretly tape-recording him for the FBI.
But the legend of Dickie Scruggs, as commonly told, generally omits a key fact. Scruggs' reputation as a giant killer of the plaintiffs bar is outdated. Even before the indictment his career was in decline. In the 10 years since the tobacco settlement, Scruggs has taken on a series of quixotic cases. These matters were much ballyhooed in the press, but in the end they shared two things: big enemies and bad results. The only major success he's seen in the last decade hasn't been for the underdog plaintiffs that he champions, but for a big corporation that he defended in a product liability case.
Scruggs' experience with tobacco, where the plaintiffs achieved what had once been thought impossible, may have left him with an unrealistic expectation of the power of the legal system to cure social ills, and perhaps an inflated view of his abilities. Befitting a man who tamed tobacco, he set hugely ambitious targets and goals. He tried to reform the health care industry, hold Wall Street responsible for subprime lending years before the mortgage crisis erupted and take on the insurance powerhouses after Hurricane Katrina. But in the end he was largely thwarted.
His lawyer, John Keker of San Francisco's Keker & Van Nest, maintains his client is innocent of the criminal charges. "There's no question he didn't know about any bribery scheme the way the government describes it," Keker says. He also notes that most plaintiffs lawyers incur their share of losses, and Scruggs is no different: "Ask any successful plaintiffs lawyer. That happens more often than not."
The tobacco settlement that made Scruggs so wealthy was in many ways an aberration. It was the first and so far the only time that plaintiffs lawyers had the clout of a small army of 46 state attorneys general behind them. In addition, one tobacco company, Liggett Group LLC, did the unthinkable and broke ranks, agreeing to cooperate with the plaintiffs. This unprecedented alliance pressured the biggest tobacco companies to negotiate.
Scruggs has never revealed how much he's earned from the tobacco settlement. A three-person arbitration panel awarded a host of plaintiffs lawyers more than $13 billion in fees, which the tobacco companies are paying over 20 years. As a pioneer of this litigation, Scruggs presumably received one of the largest chunks. After the settlement, he spent time in Tahiti and enjoyed his yachts, jets, fast cars and vacation homes. It was a life he likely never imagined during his childhood, when he was raised by a single mother who worked as a secretary in the Pascagoula shipyards. (His parents divorced when he was 6.) But, like many lawyers who don't have to work, he couldn't stop working. He seemed to believe that his tobacco wealth was coupled with a divine mandate to make the world a better place.
TAKING ON THE HMOs
After tobacco, Scruggs took aim at another populist villain, HMOs. He filed a class action RICO suit in October 1999 on behalf of up to 46 million patients who were members of six health maintenance organizations. He accused the defendents of falsely telling members that decisions about their treatment and coverage were based on medical necessity, when in fact cost-cutting guided these decisions. This litigation, he claimed, had "the power to dramatically improve the quality of health care throughout the nation." Scruggs outlined a multipronged attack: He expected institutional investors and Congress (where his brother-in-law Trent Lott was a senator) to fall in line and pressure HMOs to make sweeping changes. "We understand how to play this game now in ways that haven't been played before," he announced to Newsweek in 1999.
Scruggs enlisted some of his co-counsel from the tobacco crusade and hooked up with another famous lawyer, David Boies of Armonk, N.Y.-based Boies, Schiller & Flexner. But this star-studded assault fizzled. In 2002 Miami federal district court Judge Federico Moreno denied class certification. He reasoned that the patients' claims were too dissimilar because they had received so many differing representations from HMOs about the terms of their coverage. Scruggs and Boies proceeded with a few individual cases, but they recovered less than $250,000 in total settlements for a dozen individuals. And they didn't get a penny in attorney fees. "We got hammered," Scruggs candidly told The American Lawyer.
Instead, Scruggs could have filed a suit on behalf of doctors who contracted with HMOs. Joseph Langston, who worked with Scruggs on the HMO cases, explained to The American Lawyer in 2003 why they chose the patients: "We thought, frankly, the patients had the more compelling and emotional stories to tell." (Langston was indicted and in January pleaded guilty in a separate bribery case implicating Scruggs.) Meanwhile, a different group of lawyers moved forward with a RICO class action on behalf of 900,000 physicians. That group, led by Archie Lamb Jr. of Birmingham, got class certification from Judge Moreno and recouped settlements exceeding $2 billion.
GOING AFTER THE MORTGAGE COMPANIES
As the HMO suits were collapsing, Scruggs was pulled into another case with a sympathetic story line: low-income borrowers trying to fight Wall Street. Years earlier a group of plaintiffs lawyers had gone after First Alliance Mortgage Co., a subprime lender accused of charging excessive fees and engaging in fraud. Before Scruggs joined the litigation, in March 2002 the plaintiffs lawyers, the Federal Trade Commission and six attorneys general reached a $60 million settlement with the estate of the bankrupt First Alliance and its former chief executive officer. The plaintiffs then turned their sights on the deep pockets of Lehman Brothers Inc., which had loaned money to First Alliance and closely monitored its operations. Plaintiffs lawyer Sheila Canavan says she pleaded with Scruggs to help them. Scruggs was reluctant at first, recalls Canavan, a solo practitioner from Moab, Utah. "He said, 'I'm considering retiring. I'm mostly doing health care stuff.'"
Plus, Canavan says, Scruggs wanted to limit his workload and travel because he had undergone two back surgeries. Canavan says she swayed Scruggs by playing for him a tape of a woman describing how she had been deceived by a First Alliance loan officer. Scruggs changed his mind and joined the RICO suit filed on behalf of 4,500 borrowers in Santa Ana, Calif., federal court.
Helen Duncan, a partner at Fulbright & Jaworski who represented Lehman, says Scruggs and his team started with high hopes. "They wanted a billion dollars from us, but offered to settle for $500 million," she recalls. When Lehman tried to settle for a much smaller amount, Scruggs reportedly told the Lehman lawyers he could financially afford to see this case to the end. "God didn't give me all this money to settle," Scruggs said, according to Duncan.
Not all of Scruggs' co-counsel shared his optimism. "I did not feel there was the potential for a huge recovery [against Lehman]," says David Zlotnick of San Diego's Krause Kalfayan Benink & Slavens, who was part of the original team that sued First Alliance. Zlotnick believed the recovery would be severely limited by a provision in the First Alliance settlement. There, the plaintiffs agreed to limit their claims against Lehman to its proportionate share of fault, to the extent required by a 9th U.S Circuit Court of Appeals case. (In return, Lehman agreed to waive its objections to the settlement.) Zlotnick thought that this "bar order" would prevent them from getting much from Lehman.
Scruggs believed otherwise and approached the case like a tobacco-sized battle. "Scruggs came in with a whole crew of people," recalls Zlotnick. He enlisted friends from Mississippi, like John "Don" Barrett of The Barrett Law Office in Lexington, Miss., who has allied with Scruggs on many cases. Milberg Weiss and Lieff, Cabraser, Heimann & Bernstein also signed on. "They had a different style of litigating than I do," adds Zlotnick about the Mississippi contingent. "The Gulfstream style." (Scruggs and Barrett commuted to California on separate private jets.)
During the three-month trial in 2003, Scruggs couldn't outmaneuver the bar order. He argued that applying the order to intentional torts would violate public policy, but federal district court Judge David Carter disagreed. (In the midst of the trial, Carter did grant Scruggs' request for a break so that he could preside as King of Mardi Gras back home in Mississippi.)
The jury's verdict was technically a victory for Scruggs, but more bitter than sweet. The jury held Lehman liable for aiding and abetting First Alliance's fraudulent lending, and concluded that the plaintiffs had incurred $51 million in damages. But, following the judge's interpretation of the bar order, the jury found that Lehman was only 10 percent at fault for those damages, which trimmed the recovery to $5 million. Scruggs appealed to the Ninth Circuit without success. In December 2006 the appellate court remanded the case for a recalculation of damages that still would not have exceeded $5 million. At press time the plaintiffs had agreed to a $2 million settlement that is awaiting court approval.
The case has been a huge money drain for Scruggs' team. In their fee application, they are seeking only $1.5 million, even though they spent more than $9.3 million in time and costs. "It was a Pyrrhic victory," says co-counsel Daniel Mulligan of San Francisco's Jenkins Mulligan & Gabriel. "It was nice to win against Lehman Brothers, but the amount was definitely disappointing."
Over the years, Scruggs has attempted to paint himself as a different breed of plaintiffs lawyer, one who is more principled and discerning. He has criticized lawyers who rush to file securities lawsuits after a company's stock drops. "Those are piggyback cases, not primary kills," he told Chief Executive magazine in June 2002. "I try to take on companies that have successfully avoided liability but shouldn't have. I don't want to get there after the antelope has been brought down."
In addition to eschewing securities suits, Scruggs has also opted not to take a seat on the lucrative pharmaceutical litigation bandwagon. Scruggs, it seems, isn't eager to join a case where he can't be the leader. "I'm probably not the best person in the world to work with others on a coequal basis," Scruggs told The American Lawyer in 1996. "I like to make decisions and call the shots."
COURTING SULZER MEDICA
Scruggs' principles, however, haven't stopped him from jumping to the other side. In 2001 he offered his services to Sulzer Medica Ltd., a Swiss company deluged with suits after recalling 40,000 defective hip implants. Scruggs decided to aggressively pursue the assignment and repeatedly contacted the company's general counsel, David Wise, to set up meetings, according to Wise. The GC initially rejected the entreaties, until finally agreeing to listen to the lawyer's proposal. Scruggs could offer exceptional access to the plaintiffs attorneys, which included his Mississippi friend Barrett. After flying to Zurich to meet with Sulzer's board, Scruggs was hired.
"He brought to the table unique insight into and understanding of the mass tort plaintiffs bar [and] he was genuinely interested in helping to save the company," Wise explained in an e-mail to The American Lawyer. (Wise is now general counsel at Cyberonics Inc., Sulzer's successor.)
Scruggs described his services in a different way to the Dallas Morning News in 2001: "If you want to catch a thief, you have to hire a thief." Scruggs brought in plaintiffs lawyer Joseph Langston to assist. Scruggs and the plaintiffs lawyers ultimately reached a $1.1 billion settlement.
This corporate assignment would turn out to be Scruggs' most successful matter since the 1998 tobacco settlement. His fee was not tobacco-size, but it was generous. Sulzer paid Scruggs and Langston $5 million up front and a $20 million success fee, according to Daniel Becnel Jr., one of the plaintiffs lawyer in that case. Wise would not comment on the fee. Harvey Kaplan, a partner in Shook, Hardy & Bacon's Kansas City, Mo., office, who also represented Sulzer, offers the highest praise for Scruggs. "He was great," says Kaplan. "I found him to be creative, engaging and a gentleman." In the Chief Executive article, Scruggs explained his decision to side with Sulzer in altruistic terms: "They've been in business for 100-plus years, they make life-enhancing products, and they had one screwup. It's just another outlet for my idealism."
NEXT UP: NOT-FOR-PROFIT HOSPITALS AND WELDING INDUSTRY
Scruggs may bring the same idealism to his post-tobacco causes for plaintiffs, but they haven't fared as well. He has struggled in mass actions against not-for-profit hospitals and the welding industry.
Scruggs' battle against welding rod makers began in 2003, when he filed a case in New Orleans state court against Lincoln Electric Holdings Inc., General Electric Co. and others, alleging that the fumes from these rods cause neurological problems. More than 5,000 cases ended up as a multidistrict litigation, coordinated by Cleveland federal district court Judge Kathleen O'Malley, who appointed Scruggs and Barrett co-lead counsel. (More than 6,500 cases remained in state court.) Scruggs aligned himself with some of the country's best-known plaintiffs lawyers from the tobacco wars: Joseph Rice of South Carolina's Motley Rice; Walter Umphrey of Beaumont, Texas; Michael Papantonio, the name partner of Pensacola, Fla.'s, Levin, Papantonio, Thomas, Mitchell, Echsner & Proctor; and Richard Heimann of San Francisco.
The litigation looked promising at first. In October 2003 in a case outside the MDL not handled by Scruggs' group, a Madison County, Ill., jury awarded $1 million to a welder who claimed fumes caused his Parkinson's. "The Next Asbestos?" Forbes fretted in 2004. "I think we're talking aggregate damages way in excess of a billion dollars," said Scruggs' co-counsel John Climaco of Cleveland's Climaco, Lefkowitz, Peca, Wilcox & Garofoli in the Forbes article. The industry then settled the first Cleveland test case in 2005, paying more than $1.6 million.
But these defendants wouldn't follow the tobacco model. Instead of agreeing to a global settlement, they fought. They got an order requiring every plaintiff to detail his health claims. As a result of this and other defense motions, the federal caseload shrank to less than 1,700, according to Stephen Harburg, a Washington, D.C.-based partner at O'Melveny & Myers, which is the defendants' lead counsel. The claims of one test plaintiff set for trial collapsed when the defense secretly videotaped him acting much healthier than he claimed to be. Even plaintiffs lawyer Rice, who sat on the group's executive committee, eventually dropped out, opting to pursue fewer cases outside the MDL. "We wanted to take only cases we thought had more serious injuries," he says about the cases on Scruggs' docket.
"I think [the plaintiffs] thought they would overwhelm us with [cases], and if they could flood us with numbers early, we would buckle under the pressure," says O'Melveny's Harburg. Of the 18 cases that have gone to trial in state and federal court, the defendants have won 16. Still, the plaintiffs did get a lift at the end of last year, when a Cleveland federal jury ordered Lincoln Electric to pay $20.5 million to a former welder. Scruggs was not actively involved in that case, although a lawyer from his firm, David Shelton, assisted lead lawyer Climaco.
"We know they're tough cases," says Florida lawyer Papantonio. "Everybody had gone into this with their eyes open." Another co-counsel, however, grumbles about the costs of these cases. "[We've] lost more than we've won. Way more than we've won," says Becnel, who sits on the plaintiffs executive committee and says he has spent more than $1 million of his money on the cases.
Scruggs' attempt to reform the world of not-for-profit hospitals has foundered even more in the courtroom. In the summer of 2004 Scruggs started filing RICO suits against not-for-profit hospitals around the country, accusing them of violating their mandate to provide indigent care. The claims were made on behalf of uninsured patients who received huge hospital bills. The patients claimed standing as third-party beneficiaries of a contract between the hospitals and the federal government, a contract supposedly created by the hospitals' tax-exempt status. As usual, Scruggs' crusade attracted headlines, but the litigation sputtered. Every one of the cases has been dismissed on the pleadings. Most of the courts concluded that the plaintiffs have no standing. One judge lashed out at these actions. "Plaintiffs here have lost their way," wrote federal district court Judge Loretta Preska of the Southern District of New York. "They need to consult a map or a compass or a constitution, because plaintiffs have come to the judicial branch for relief that may only be granted in the legislative branch."
AND THEN THERE WAS KATRINA
Scruggs' string of professional disappointments was joined by a personal one. In August 2005 Hurricane Katrina damaged his house in Pascagoula and harmed hundreds of thousands of others in his home state. The situation was tailor-made for a Scruggs' attack: hordes of sympathetic plaintiffs versus unsympathetic insurance companies.
Scruggs responded by forming the Scruggs Katrina Group in September 2005 with Barrett and three other Mississippi firms. The next month they filed a test homeowner suit against Nationwide Mutual Insurance Co. on behalf of Paul and Julie Leonard, a Pascagoula police lieutenant and his wife. The Leonards' house was inundated with five feet of water, and the couple claimed damages exceeding $130,000. Nationwide paid them only $1,661, the portion that the insurer said was due solely to wind. The plaintiffs' policy covered wind damage but excluded flood damage, and Scruggs accused the insurer of undervaluing the wind damage. He also claimed that Nationwide should be liable for damage caused jointly by wind and water.
The case was tried without a jury by senior federal district court Judge L.T. Senter Jr. in Gulfport, Miss. After an eight-day trial, Scruggs failed to get much more for the Leonards. Judge Senter awarded them just $1,228 in additional recovery. The Leonards' damages were disappointing but Scruggs did win a key point that could help him in other cases. Senter invalidated language in the Nationwide policy that appeared to prevent any recovery for damage caused jointly by wind and water; he held that the language was ambiguous and could not be enforced. That victory was short-lived. In August 2007 the 5th Circuit reversed and held that the language was enforceable.
Before the 5th Circuit issued its opinion, Scruggs settled other cases against Nationwide for a confidential amount. Scruggs also settled a slew of suits he had brought against Allstate Property and Casualty Insurance Co. and State Farm Fire and Casualty Co. Inc. According to the Web site of the Katrina Litigation Group (which recently changed its name from the Scruggs Katrina Group) the group has settled 1,300 claims. As part of a settlement of 640 cases with State Farm, Scruggs and his co-counsel got $26.5 million in fees. The fee award prompted a suit by Scruggs' co-counsel, John Jones, who claimed Scruggs was denying him his portion of the fees. It was in this case that Scruggs is alleged to have bribed a Mississippi state court judge for a favorable ruling. Since his indictment, Scruggs has withdrawn from all Katrina litigation.
Scruggs' indictment has left many who know him astounded and perplexed. "The whole thing is a shock," says R. Eric Kennedy of Cleveland's Weisman, Kennedy & Berris, who has worked with Scruggs as a plaintiffs lawyer and has also dealt with Scruggs as an adversary. "He is the epitome of honesty and honor. He's a pretty stubborn guy about doing things the right way. ... He's never been close to the line. Not even close." Papantonio, who has worked besides Scruggs on several cases, finds it hard to believe that he would risk his livelihood for a dispute over fees that are paltry compared to his wealth. "Ten to 15 million dollars doesn't change his life," Papantonio says.
Even if Scruggs is exonerated, it may be hard for him to revive a career marked recently by good intentions and disappointing results.
— Richard "Dickie" Scruggs, whom the Associated Press has dubbed the “King of Torts”, pleaded guilty Friday, 14 March 2008, to conspiring to bribe a judge — a crime that could send him to prison and spell the end of his storied legal career. (Melvin M. Belli was the real King of Torts)
Federal prosecutors are asking for the maximum of five years behind bars for the 61-year-old Scruggs, the multimillionaire "King of Torts" who combined a shrewd legal mind and aw-shucks country-lawyer charm to extract billions of dollars from the tobacco and asbestos industries, among others.
He will also lose his license to practice law.
Scruggs and another lawyer in his firm, Sidney Backstrom, pleaded guilty to conspiracy to defraud for offering a $50,000 cash bribe to a Mississippi judge for a favorable ruling in a dispute over legal fees from a Hurricane Katrina insurance lawsuit.
In return for Scruggs' guilty plea, prosecutors will recommend that the judge drop several other counts against him, including fraud. No sentencing date was set during the hearing at the federal courthouse in Oxford.
Scruggs' son and law partner, Zach, also is charged in the case but did not enter a plea and is expected to go to trial.
For months, Scruggs appeared intent on fighting the charges, and many reporters who had closely followed the case were caught off-guard by the plea bargain. Scruggs folded after two of his co-defendants turned on him, one of them secretly tape-recording him for the FBI.
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