A few months ago I was talking with a retired lawyer with a mass tort claim that fit squarely within our firm’s criteria. Given the details he provided, there really wasn’t a lot to do pre-suit, my next steps would be to get the medical records to confirm what happened, file the complaint, and then get to work.

Being a lawyer, he unsurprisingly wanted to know the whole process “from start to finish,” so we spent a while on the phone talking about short form complaints, plaintiff’s fact sheets, the plaintiff’s steering committee, the bellwether trials, and so on. The machinery of mass torts litigation isn’t an easy thing to explain; everybody knows (or thinks they know) what a class action is, but there aren’t actually any “class actions” for drug injuries, there’s just federal multidistrict litigation (MDL) and state consolidated litigation, both of which are strange hybrids between class actions and individual suits. When we finished up and I told him that we would get to work on his case, he said “and I’ll do my part by re-reading John Grisham’s The Litigators,” and we shared a laugh.

It seems like most of the lawyers I know disdain Grisham’s novels the same way doctors disdain ER and Grey’s Anatomy, and, quite frankly I had never read one nor had an interest in reading one. Like many lawyers, I find legal fiction — whether a novel, a TV show, or movie — painful. It’s either banal or unbelievable, and even the slightest misstep in the details ruins the suspension of disbelief. Most of it looks like this to me.

I hadn’t heard of The Litigators, but upon reading the blurb, I realized I was probably obligated to read it:

The partners at Finley & Figg—all two of them—often refer to themselves as “a boutique law firm.” Boutique, as in chic, selective, and prosperous. They are, of course, none of these things. What they are is a two-bit operation always in search of their big break, ambulance chasers who’ve been in the trenches much too long making way too little. …

[A] huge plaintiffs’ firm in Florida is putting together a class action suit against [Krayoxx, a cholesterol drug potentially linked to heart attacks]. All Finley & Figg has to do is find a handful of people who have had heart attacks while taking Krayoxx, convince them to become clients, join the class action, and ride along to fame and fortune. With any luck, they won’t even have to enter a courtroom!

It almost seems too good to be true. And it is.

I’ve written before about ambulance chasing lawyers, and how mass torts cases aren’t as easy as some lawyers claim, so onto the Kindle The Litigators went. I prepared myself for the worst, not least because of the blurb’s erroneous reference to “class actions” instead of “multidistrict” or “consolidated” litigation.

Surprisingly, I liked it, for the same reason I thought Boston Legal was the best of the TV lawyer dramas: Grisham doesn’t try for pure realism and fail, instead he satirizes mass torts (and injury litigation as a whole) by taking real themes and then exaggerating them. There are various inaccuracies and far-fetched plot devices, but they can be forgiven because the book rings true as it lampoons the field. 

In portraying Finley & Figg, the book touches upon the real themes of practice outside of the big firms, like the strange mixture of constant boredom and stress that permeates a “general practitioner” who dabbles in several fields but masters none, and the toll that takes on the lawyers and their families.

While lawyers considering solo and small practice often think they can build an enjoyable practice filled with fascinating work that balances lucrative contingent fee work with steady billable work, such an idea is usually a terrible business model, and the typical small law practice is characterized by monotony, modest income, and a perpetual hustle for business just to keep it afloat. When it comes to a small law firm, if you weren’t born with the entrepreneurial spirit, then you’re just going to have to force it.

The life of the two-bit lawyer is then contrasted with the apparent prestige of big firm work, often just a façade for soul-sucking hours and work that is ethically permissible under the standards of the profession but largely immoral under the standards of basic human decency. When one character’s spouse questions the ambulance chasing ethics at Finley & Figg, he reminds her of one of his big corporate firm’s most prominent cases: the firm fought for years — successfully — to preserve a polluter’s “right” to dump toxic chemicals in a river. That ends the argument.

The real-life themes of mass torts are accurate, as well. Grisham shows, for example, the ruthlessness of the pharmaceutical companies and the wars of attrition and delay they launch with essentially unlimited resources, and the uneasy relationship between the individual attorneys that get the clients and the specialized mass torts bar that litigates the cases (as Mark Lanier calls this divide in the asbestos context, “chicken catchers and chicken pluckers”). Then there’s the ultimate reality that, for all the huffing and puffing of lawyers for both sides, once the pre-trial issues are resolved, the trials themselves are typically decided based on the science.

Points of the book had me genuinely laughing out loud, and other reviewers have noted that The Litigators is perhaps Grisham’s funniest book. I thus recommend the book for lawyers looking for something light and funny. I am a bit concerned that non-lawyers may be learning about the law through the book, not recognizing it is a satirical version of mass torts, not a documentary.

Rolling Stone’s Matt Taibbi described Goldman Sachs as “a great vampire squid wrapped around the face of humanity,” a phrase that, while defamatory of a uniquely adapted cephalopod minding its own business 3,000 feet under the sea, rang true. Yesterday, the intermediate appellate court for New York state agreed: Goldman Sachs is so obviously dishonest that you cannot sue them for fraud unless you get them to specifically agree that they aren’t lying to you.

First, the facts. In essence, Goldman Sachs brought in a hedge fund (Paulson & Co.) to put together a group of horrible investments (called “Abacus”) that they expected to fail — and even bet against — and then set about finding rubes to invest in it, thereby helping Goldman and Paulson make a tidy profit off the investor’s losses. One other banker who passed on the deal described it as “like a bettor asking a football owner to bench a star quarterback to improve the odds of his wager against the team.” (He’s quoted in the dissent.)

ACA Financial Guaranty Corporation was one of the rubes Goldman Sachs found. As Reuters reported, ACA’s lawsuit against Goldman Sachs “alleged that Goldman misrepresented the role of the hedge fund Paulson & Co, which supposedly selected underlying mortgage-backed securities that doomed the [collateralized debt obligation] to fail, thereby assuring Paulson of big profits on its undisclosed Abacus short.” The scam was so blatant the Securities and Exchange Commission brought its own case against Goldman Sachs, which settled for $550 million.

Sounds simple enough; as James Surowiecki wrote about the scandal three years ago, echoing the thoughts of many financial journalists, there was ample reason to believe that ACA was both a “dupe” hoodwinked by Goldman and a “dope” that failed to perform adequate due diligence on a complicated investment. Being a “dope” is a problem, but one would assume that a duped dope would be allowed to present evidence to a jury arguing that the fraud was a bigger problem than the lack of due diligence.

Except that the New York courts won’t let ACA get to a jury. As the New York Appellate Division just affirmed in ACA Financial Guaranty Corp. v Goldman, Sachs & Co., “a fraud claim is barred where a sophisticated and well-counseled entity fails to include an appropriate prophylactic provision in the agreement governing the transaction from which the legal dispute arises to ensure against the possibility of misrepresentation.” It didn’t matter that Goldman Sachs had repeatedly misrepresented to ACA that Paulson was actually investing in the deal (rather than engineering the deal to fail), because, the majority of the Court held:

(1) such misrepresentations were specifically contradicted by the offering circular’s disclosure that no such equity position was being taken [and]

(2) plaintiff’s alleged reliance on such misrepresentations would have been contrary to its acknowledgment in the offering circular that, in entering into the transaction, it was “not relying upon any representations (whether written or oral) of Goldman Sachs other than in the final offering circular

Opinion, p. *3 (some edits made for formatting and clarity). Putting aside the affirmative misrepresentations for a moment, there’s nothing unusual about the above analysis. That sort of language is called an “integration clause” or “merger clause,” and it’s taught in 1L Contracts alongside the “parol evidence rule.” In short, if a contract says something like, “you agree that nothing we wrote or said outside of this contract itself mattered to you,” then courts will hold sophisticated parties to that agreement. There’s a straightforward explanation of these clauses in UAW-GM Human Resources Center v. KSL Recreation Corp., 579 N.W.2d 411, 414 (Mich. 1998).

But that holding wouldn’t have been enough to dismiss the lawsuit, and so the court also held that ACA couldn’t sue Goldman for lying about the hedge fund’s role because “[ACA] was in direct contact with the hedge fund, [but] failed to ask the hedge fund what position it intended to take in this investment.” In other words: it is the law of New York that Goldman Sachs is so dishonest that anyone who trusts their word deserves what they get.

This part of the ruling was, in a word, nuts. It has long been the law that an integration or merger clause will not protect a fraud when the fraud is sufficient to set aside the whole contract. Indeed, one of the leading cases on this issue comes from New York: Sabo v. Delman, 3 N.Y.2d 155, 164 N.Y.S.2d 714, 143 N.E.2d 906 (1957): “Indeed, if it were otherwise, a defendant would have it in his power to perpetrate a fraud with immunity, depriving the victim of all redress, if he simply has the foresight to include a merger clause in the agreement. Such, of course, is not the law.” See also 3 Williston on Contracts, §§ 811-811A; 3 Corbin on Contracts, § 578; 2 Restatement, Contracts, § 573. The dissent notes that was still the law of New York state, too, per DDJ Management, LLC v Rhone Group, L.L.C., 15 NY3d 147, 153, 156 (2010)(“Where, however, a plaintiff has taken reasonable steps to protect itself against deception, it should not be denied recovery merely because hindsight suggests that it might have been possible to detect the fraud when it occurred.”).

But, just like there is financial risk, there is legal risk, too. Most lawyers wouldn’t have said that ACA could have certainly sued Goldman for fraud, or that demanding the integration clause be removed would have saved them, only that such a measure would have put ACA in a better position. You never know when a slim majority of a Court is going to hold that the joke’s on you.

I suppose the lesson is quite simple: don’t do business with a vampire squid.

[Update: Matt Levine at DealBreaker has a thorough post on the case, pointing out that, while ACA was indeed duped and lost money because of it, "ACA is perhaps the least sympathetic of all the financial crisis victims" given that they were "as much co-conspirators as they were victims." I wouldn't go that far — they lost money due to Goldman's misrepresentations, making them more a victim than a co-conspirator in my book — but their role in the transaction was certainly dubious and worthy of scrutiny.

Nonetheless, there are still two big problems with the court's opinion. First, ACA's role and their ability to discover the fraud are exactly the sort of messy factual issues that juries resolve at trials, not the sort of clean-cut indisputable legal issues judges resolve on briefs. Second, the court's opinion isn't narrowly limited to the precise facts of this transaction; indeed, their argument could be used to punt all of the lawsuits brought by every investor, including those who were clearly victims, not co-conspirators. Taken at face value, it's almost a repudiation of the Sabo rule, at least for sophisticated businesses, and while that might be justifiable for ACA in this case, it certainly isn't justifiable for all business cases.]

Last week, a bunch of banks won a major federal appellate court victory. That’s no surprise, of course, but the case nonetheless signals slow but steady progress in the otherwise dismal field of patent law, particularly as it applies to patents involving matters of abstract reasoning like computer software and business methods.

First, a refresher. Surely you remember how a bill becomes a law. But what happens when the bill doesn’t say much, and it’s left to the Executive Branch and the Judiciary to figure out what it means?

That, in a nutshell, is what has happened with the Patent Act. Congress passed a law way back in 1793 providing patent protection for “any new and useful art, machine, manufacture or composition of matter and any new and useful improvement on any art, machine, manufacture or composition of matter.” The only real difference after 1952 is the addition of the term “process” in lieu of “art,” with a definition of “process” so expansive — e.g., the “term ‘process’ means process, art or method, and includes a new use of a known process, machine, manufacture, composition of matter, or material” — that it makes the word virtually limitless.

Back in 1952, Congress enacted a couple changes around the fringes — without reconsidering the core text of the statute — for a variety of reasons, including because, when it came to assessing whether an invention really deserved a patent, “judges did whatever they felt like doing according to whatever it was that gave the judge his feelings—out of the evidence coupled with his past mental conditioning—and then selected those precedents which supported his conclusions.” George M. Sirilla & Hon. Giles S. Rich, 35 U.S.C. 103: From Hotchkiss to Hand to Rich, the Obvious Patent Law Hall-of-Famers, 32 J. Marshall L. Rev. 437, 501 (1999). The 1952 Act was supposed to fix that by replacing judicially-created standards for “inventiveness” and the like with an objective test for “obviousness.”

That’s pretty much been the course ever since then: Congress hasn’t made much effort to define the limits of patent law, and so it’s determined by way of a strange triangulation between the U.S. Patent Office, which issues patents in the first place, the Federal Circuit Court of Appeals, the one and only court to which plaintiffs in patent cases have a right to appeal, and, the Supreme Court, which occasionally grants certiorari and gives the lower courts guidance. It is not a healthy way to run a patent system; neither executive agencies nor courts are particularly well-suited to consider and to address large societal changes like, say, the rise of the digital computer, which took place almost entirely after the last major revision to the Patent Act more than half a century ago.

Yet, somebody has to do the job, and the bulk of that work has fallen to the Federal Circuit. Last week, they issued a doozy of an en banc opinion in CLS Bank v. Alice Corp. The JURIST’s Paper Chase has links to the software patents at issue. Frankly, it’s hard to call any of them “inventions.” The “inventors” didn’t actually make anything; instead, they tried to shoehorn some ideas for software code — which is already protected by copyright — into the definition of a “process” or a “machine.” This is only allowed because courts have said it’s allowed, not because of any indisputable argument for calling a general description of  software running on a computer a “process” or a computer with a certain type of software on it a “machine” in the same ways those terms were understood in 1952.

The opinion, in which seven of the ten Federal Circuit judges agreed the “inventions” in the patents weren’t really worthy of patent protection, has garnered significant press. It’s unfortunate that there wasn’t any agreement by a majority of judges for why the inventions weren’t eligible for patent protection, but it’s quite fortunate that a significant majority of the Federal Circuit held that the abstract claims at issue in the case — in essence, the “inventions” were nothing more than general descriptions of how to make software that help financial traders in particular circumstances — shouldn’t have been granted patents. 

Judge Kimberly Moore filed a dissent claiming that “if all of these claims, including the system claims, are not patent-eligible, this case is the death of hundreds of thousands of patents, including all business method, financial system, and software patents as well as many computer implemented and telecommunications patents.” Frankly, many people (including myself) would consider that a good thing. The EFF, which filed an amicus brief, has asked the Supreme Court to pick up the case and clarify again — as Bilski v. Kappos failed to do — the scope of patentability.

If you want a more detailed review, consider Patently-O or IPWatchDog. I write more to address Chief Judge Rader’s “Additional Reflections” at the end of the opinion, where, as part of his argument that the court should consider some types of software patents to be within the scope of patentability, he recommends the court “consult the statute!” To wit:

The statute offers a patent to both inventions and discoveries, including simply an improvement on a known process or product. The statute further directs that even the mere new use of an old machine is eligible for patenting, with, of course, a high obstacle of meeting the conditions of patentability set forth in Sections 102 and 103 of the Patent Act ahead. … [T]he Supreme Court long ago held that Section 101 is not a “condition of patentability.”

[T]o inject the patentability test of “inventiveness” into the separate statutory concept of subject matter eligibility makes this doctrine again “the plaything of the judges who, as they became initiated into its mysteries, delighted to devise and expound their own ideas of what it meant; some very lovely prose resulting.” Giles S. Rich, Principles of Patentability, 28 Geo. Wash. L. Rev. 393, 404 (1960).

I commended Chief Judge Rader two months ago for his pragmatic understanding of how patent trolls work, and there is a superficial appeal to his “consult the statute” argument, but the truth is that we are a long way from 1952, both of terms of the inventions that drive — and hinder — our economy, and in terms of the considerable baggage of precedent now attached to the Patent Act. Given Congress’ decision not to legislate with any further detail, patent law is already “the plaything of the judges,” and they should not absolve themselves of responsibility by pretending otherwise.

As I’ve mentioned before, due to the ubiquitous presence of asbestos in certain industries all the way until the 1990s, we could see 60,000 or more new mesothelioma cases filed over the next few decades, and it seems there are still many big questions to answer through litigation. We should be talking about ways to streamline that process and, more than that, looking for ways to cure or to prevent mesothelioma.

Yet, when insurance companies and negligent corporations want to avoid responsibility for hurting someone, they try to change the subject by pointing the finger at the trial lawyers. Thus, earlier this week the Wall Street Journal had a long profile of the relationship between the lawyers who represent mesothelioma patients in their claims against the asbestos companies and the doctors who treat mesothelioma patients. In short, nobody funds mesothelioma research — not the government, not the big pharmaceutical companies, and certainly not the companies responsible for poisoning tens of thousands of workers — and thus much of the research money ends up coming from non-profits funded by mesothelioma lawyers who, having spent years watching their clients succumb to mesothelioma, felt compelled to put their own money back into improving treatments and, maybe, finding a cure.

But I bet you already knew where the Wall Street Journal was going with these  donations:

The two have forged what has become an increasingly common relationship between a subset of cancer doctors and plaintiffs’ attorneys, sharing what for each is an increasingly scarce but valuable resource: victims of mesothelioma.

It is an unusual alliance in the world of medicine that some ethics experts say blurs ethical lines. This is particularly true when doctors refer patients to attorneys who provide financial support for their medical research.

And there you go: in one fell swoop, people dying of cancer caused by just going to work are reduced a “valuable resource,” and charitable giving is turned into an implied ethical violation, and the handful of doctors capable of treating these patients have a cloud of doubt cast over them. The WSJ then had a companion article about advertising for asbestos lawsuits that relies primarily on remarks by “a provider of Internet marketing software and services” and someone who “specializes reselling domain names he has purchased,” as if either of them had a clue about how mesothelioma clients actually find lawyers.

Let’s put aside the fact that the two WSJ articles reach opposite conclusions — one says the clients are passed along by nefarious doctors, the other says clients are “caught” through blanket television and web advertising — and go back to the accusation that there’s something wrong with mesothelioma lawyers putting money, with no strings attached, into non-profits that grant research funding, and that there’s something wrong with mesothelioma doctors accepting that money to conduct research. 

Two of the lawyers mentioned in the article, Jerome H. Block at Levy Phillips & Konigsberg LLP and Roger G. Worthington at Worthington & Caron, have posted their own responses. Block’s response notes:

As the article discusses, our firm has donated money to New York University to help fund the ground-breaking mesothelioma research of Harvey I. Pass, MD. Last year, this research money contributed to a landmark study published in the New England Journal of Medicine that identified, for the first time, a marker in human blood that may be able to detect mesothelioma at an earlier stage when it might be more treatable. … We have also donated money to the Mesothelioma Applied Research Foundation (MARF) for many years, because MARF is the only non-profit organization in the United States that turns its donations into research grants that are selected by an independent scientific advisory board.

Worthington’s response notes:

[I]f money curries favor, from a strict profits and losses perspective, why hasn’t the asbestos industry donated to research? A few years ago, Dr. Cameron was invited to speak to 600 asbestos defense lawyers, insurance adjusters and company reps. He talked about the medical and ethical benefits of sponsoring research. How much did they pony up? Zero. Now, that’s “disgraceful.”

The asbestos industry is notorious for corrupting the medical and scientific literature with false and deceptive articles they paid for designed to prove to juries that asbestos is as benign as mother’s milk. If anyone knows how to curry favor with money, it’s the asbestos industry.

All fair points. To me, the most revealing part of the WSJ article was — like with all the hoopla surrounding the “fraud” found in the asbestos trusts — the absence of any concrete examples of a problem. The money is out there for everyone to see, all part of above-board non-profits, and yet the best the Wall Street Journal could come up with was “the case of a mesothelioma patient who, acting on the advice of an attorney, requested a surgery [the thoracic surgeon] had deemed medically unnecessary. The reason? Complicated surgery could make for a more compelling court case.”

I have my doubts about the facts underlying that case — it could be as simple as the client blurring together two separate remarks from the attorney, one about how more surgeries can produce higher awards and another about talking to their doctor about a variety of possible treatments — but, more to the point, the example disproves the main thesis of the article, i.e., that doctors are altering their treatment to please lawyers. A Boston University professor who long ago represented asbestos defendants wonders if “the pitfalls of a conflict of interest will trip up the lawyers or the doctors, even those with the best intentions” — if so, then the WSJ wasn’t able to dig up any evidence of it.

The most potentially misleading quote comes from Dr. Jerome Kassirer, the former Editor-in-Chief, New England Journal of Medicine:

It “has the taste of a kickback,” said Dr. Jerome Kassirer, author of a book about financial conflicts of interest in medicine and a former editor in chief of the New England Journal of Medicine. “This is a disgrace to both professions,” he said.

Note that the “it” in that quote comes from the Wall Street Journal, not Dr. Kassirer. What exactly was he calling a “disgrace?” It seems highly unlikely he would call the Mesothelioma Applied Research Foundation — which makes grants vetted by an independent scientific advisory board, a far better process than the cynical processes used on a daily basis by the pharmaceutical industry to control research into new drugs — a “disgrace” to either profession. I wonder whether the reporter gave him the misleading prompt in the prior sentence, which falsely claims “doctors refer patients to attorneys who provide financial support for their medical research,” a quid pro quo claim the WSJ wasn’t able to prove actually happens.

Just another day and another effort to distract the public and politicians from a real health and safety issue by blaming trial lawyers.

Earlier this week at DealBook, in a post about how “In Venture Capital Deals, Not Every Founder Will Be a Zuckerberg,” professor Steven Davidoff cites to research showing that “the dirty secret of venture capital is that the dream can be dashed as the venture capitalists make millions in a sale, leaving the founders with nothing.” Davidoff also references a study by Brian Broughman and Jesse Fried that found, in Davidoff’s words, “that founders who negotiated greater control rights ended up receiving on average $3.7 million more.”

I don’t doubt that’s true, and as I’ve explained on this blog before, despite strange claims by conservatives to the contrary, corporations put profits before everything else, and corporate executives and board members tend to put their interests before shareholders’ interests. The idea that venture capitalists are out to make money, including at the expense of startup company founders, really shouldn’t surprise anyone. If you want to make money from a corporation, you need control. Venture capitalists know that. Startup founders should know that.

But how do startup company founders maintain control of their company? They could spend a couple hours at night teaching themselves the finer points of fiduciary duties in Delaware and then try to outwit the investors (and their lawyers) who have done this a hundred times, or they could shell out their own money to pay for their own personal lawyers. 

Two years ago, venture capitalist Fred Wilson wrote on his blog “A Challenge To Startup Lawyers,” complaining that “The legal fees for [a seed round funding] transaction were $17,000,” and challenging lawyers to bring their fees down lower, given how they “just signed the standard documents which were tweaked to reflect the round size, share price, and board provision in the term sheet.” I posted a reply, explaining how legal work isn’t piecemeal, and how a lawyer becomes responsible for everything related to the transaction.

That only explains why the lawyer costs so much; what I didn’t go into detail about was the value you get out of that.

Davidoff’s column began by referencing a recent lawsuit filed by the founders of Bloodhound Technologies — who received a mere 0.0004364% of the company’s value when it was sold — against the venture firms that invested in the company. The case, as summarized thoroughly in the opinion written by Vice Chancellor J. Travis Laster (of the Delaware Chancery Court) denying the venture capitalist’s motion to dismiss the case, is a perfect example of why startup founders want their own lawyer, not some lawyer for the investors, not some lawyer for the company, and not some “lawyer for the situation,” looking at the deal.

As alleged, the Bloodhound Technologies lawsuit wasn’t just an example of the venture capitalists extracting a better deal for themselves, it was a textbook freeze-out and dilution case. You could teach a law school class on corporations with it. Importantly for my point here, there were ample signs of a problem years before the eventual sale, and several strategies the founders could have undertaken to protect themselves — if they had had an attorney on their side. Let’s pull some quotes from the opinion:

The venture capitalists‘ first move was to ease Carsanaro out of the top spot. According to the complaint, the venture capitalists convinced the board that “hiring a CEO with additional Healthcare domain experience would make [Bloodhound] more marketable to potential acquirer.” …

[T]he venture capitalists convinced the board that Bloodhound should raise “one last round of financing for the Company, in the form of a new round of Series C convertible 5 preferred stock.” …

The size of the board was increased from five to six…

[The venture capitalists] then reopened the terms of the Series C Preferred. [The founders] were excluded and not kept informed. …

[T]he size of the board was increased again…

[The original founder and CEO] was asked by the board “to resign as a director, officer, and employee of the Company …”

All of that happened in six months, and it only got worse from there, as the venture capitalists allegedly entered in multiple deals in which they “raised capital” from themselves, thereby further diluting the value of the founders’ shares until, by the time the company was sold for $82.5 million, the founders owned less than 1% of the company.

If you’re a startup founder who is considering or who already has venture capital funding, you owe it to yourself to read pages 1-15 of Chancellor Laster’s opinion. As Chancellor Laster summarizes the complaint, the scheme looks so clear; so, how come the founders didn’t know they had been rooked until a decade later when the company was sold? Part of it is the benefit of hindsight, but another part — in my opinion, a larger part — is that the founders now have lawyers to identify and to frame these issues appropriately.

If the founders had had lawyers at the time, they could have taken steps to preserve their control and ownership of the company (like staggering board elections, or fixing the size of the board, or prohibiting further insider equity investments), even while meeting the investors’ claimed needs, like bringing on a more experienced CEO. Going back to Fred Wilson’s example, $17,000 sounds like a lot to shell out for a lawyer giving a thumbs’ up to a deal — and, frankly, I know there are plenty of young, smart lawyers out there who could do the same for much less than the big corporate law firms charge — but it sure beats getting only $36,000 when the company you founded is sold.

In case you missed it, last week I had a guest post up at TortsProf lamenting how recent changes in civil procedure law have created a situation in which judges are frequently deciding complex cases by improperly deciding for themselves what the true facts were, in advance of a jury trial, and sometimes on nothing but the initial complaint.

Unfortunately, we just had another example: the recent order in the NuvaRing litigation consolidated in New Jersey state court dismissing all of the bellwether cases, primarily on causation grounds. It’s not the end of the game — motions for reconsideration will be filed, as will an appeal, and it doesn’t affect the federal court MDL — but it’s disappointing nonetheless. There’s much to complain about (and, on appeal, to reverse), but I’m going to focus on the “learned intermediary” part. First, a little bit of background.

The most popular form of hormonal contraceptives are combined hormonal contraceptives (“CHC”), which use an estrogen (typically ethinyl estradiol) to prevent ovulation and thicken cervical mucus. Estrogen use, however, is correlated with an increased risk of venous thromboembolism, such as deep vein thrombosis, and thus pulmonary embolisms (blood clots in the lungs) and cerebral venous thrombosis (blood clots in the brain), so CHCs add a progestin to counterbalance that risk.

NuvaRing uses desogestrel as its progestin, making it a “third-generation” CHC. Since 1995 — six years before NuvaRing went on the market — it has been known that third-generation CHCs have a significantly higher risk of causing thrombosis and blood clots than second-generation CHCs. As the New Jersey court opinion recounts (based on the plaintiffs’ filings), by the time NuvaRing went on the market in 2001, 15 studies had examined that difference in risk, and 13 of those studies found an elevated risk, ranging between 1.4 times and 4 times greater risk of venous thromboembolism when using NuvaRing.

NuvaRing’s prescribing information and patient insert warned about the general risk of venous thromboembolism when using CHCs, but then hedged on the increased risk with vague, ambivalent language obviously written more for purposes of litigation than for informing patients and doctors about the risks of the product:

The use of combination oral contraceptives is associated with increased risks of several serious side effects, including blood clots, stroke, or heart attack. NuvaRing is not for women with a history of these conditions. The risk of getting blood clots may be greater with the type of progestin in NuvaRing than with some other progestins in certain low-dose birth control pills. It is unknown if the risk of blood clots is different with NuvaRing use than with the use of certain birth control pills.

The risk “may be greater” but “is unknown?” That wasn’t even accurate when NuvaRing was first put on the market, and now, more than a decade later, it is even less defensible: last year, a meta-study of 625 studies published between January 1995 and April 2010 found the risk of venous thromboembolism for CHCs that use desogestrel, like NuvaRing, was about double the risk of second generation CHCs. Yet, the manufacturer (Organon and Merck) have refused to update the label; perhaps it’s because they sell over $600 million worth of NuvaRings every year to over a million women.

If this was a law school exam, there really wouldn’t be much more to say: Organon and Merck plainly failed to warn women that NuvaRing was twice as likely (or more) to cause blood clotting injuries than other contraceptives that work just as well, despite ample evidence of the danger. Under general principles of strict liability, “where the product contains an ingredient … whose danger is not generally known [to the public] … the seller is required to give warning against it, if he has knowledge, or by the application of reasonable, developed human skill and foresight should have knowledge, of the presence of the ingredient and the danger.” Feldman v. Lederle Labs., 97 N.J. 429, 452, 479 A.2d 374, 386 (1984)(Quoting Second Restatement of Torts, Section 402A, comment j).

In a fair and rational legal system, the case would go to a jury to resolve three issues:

(1) whether NuvaRing really is more dangerous than other CHCs (Organon and Merck could point to the handful of studies showing no difference, and their own researchers continue to say there’s no difference);

(2) whether a better warning would have caused either the doctor not to prescribe it or the patient not to take it;

and, assuming the jury found for the plaintiff on both of those,

(3) the damages suffered by the plaintiff.

But this is pharmaceutical liability law, and so the rules are, sadly, often applied in absurdly skewed manner to benefit the defendant drug maker.

Take, for example, the case of Jackie Bozicev, one of the cases just dismissed. In April 2007, Jackie delivered her second child, was prescribed NuvaRing the next month, and then in December suffered a pulmonary embolism in front of her two-year-old son. She died the next day. The Court held that, under the odious “learned intermediary” doctrine, what Jackie knew about the risks was irrelevant —all that mattered was what her prescribing doctor knew about the risks of NuvaRing, as if Jackie had no say in the matter.

Her doctor testified that she knew NuvaRing had a risk of venous thromboembolism like all CHCs, and that NuvaRing sales representatives had come to speak with her (see an example of what that’s like here), but she couldn’t remember what they said. She said she knew NuvaRing may have a greater risk to it — essentially repeating the same erroneous information on the prescribing information — but she certainly didn’t say she knew NuvaRing was twice as dangerous as the alternatives, nor did she say she considered it  while prescribing Ms. Bozicev NuvaRing, nor did she disclose this risk.

Too bad. The Court held, “Ms. Bozicev’s treating physician was aware of the risk of VTE and ‘nonetheless determined NuvaRing’s use to be warranted. … [Plaintiff] has not presented evidence to the Court as to whether [her doctor] would have changed her decision to prescribe NuvaRing had the warning reflected a higher risk of injury.” Thus, Organon and Merck are off the hook because, though Jackie plainly didn’t know NuvaRing was more dangerous, and though Organon and Merck still vehemently deny it is more dangerous, her doctor somehow knew for sure that it was, despite her testimony that she didn’t.

How did the Court get to that hopelessly wrong answer? By relying on a completely different case, Strumph v. Schering Corp., 256 N.J. Super. 309 (App.Div.1992)(affirmed without opinion, 133 N.J. 33 (1993)), in which a person with paranoid schizophrenia was admitted to the hospital after a suicide attempt and was prescribed a drug (Trilafon) that warned about, and was generally known by psychiatrists to cause, in rare instances, a serious neurological disorder. In Strumph, both treating physicians testified quite clearly they were aware of the risks of the drug and that they conducted a risk-benefit analysis before prescribed it.

Indeed, as Judge Skillman’s dissent in the Appellate Division’s order in Strumph notes (that dissent is important because it’s what the New Jersey Supreme Court affirmed in its one-sentence opinion, and the dissent is what the NuvaRing court cites), “in the normal course of human behavior one would not expect a physician to admit that he was not well informed regarding a powerful chemical compound he was dispensing to a patient or to admit that the medicine he prescribed was not the most appropriate alternative.” Strumph, 256 N.J. Super. at 325, quoting Seley v. G.D. Searle & Co., 423 N.E.2d 831, 839 n. 5 (Ohio 1981). Judge Skillman also noted the doctors had “no relationship with the drug manufacturer which would be likely to generate any bias in its favor.”

The NuvaRing cases, like Jackie Bozicev’s case, have nothing at all in common with Strumph; the NuvaRing plaintiffs weren’t suicidal individuals with paranoid schizophrenia for whom other medications hadn’t worked, patients who were thus willing — or required by involuntarily commitment — to accept virtually any potential side effect to save their lives, and to whom the risk was disclosed by the medication’s prescribing information. The NuvaRing plaintiffs were healthy women who had myriad birth control methods available to them, including safer hormonal methods. There’s no reason for the Court to even consider making a definitive factual finding before trial that the increased risks were irrelevant to the patients, and thus dismissing the cases, but that’s just what it did.

The whole supposed argument behind the odious “learned intermediary” doctrine is the dubious claim that a pharmaceutical company need only warn a doctor, not a patient, about the drug’s risks, after which it’s up to the doctor completely. Maybe that argument makes sense in Strumph, where the risk was disclosed by the drug manufacturer and was well known by the treating physicians, but it makes no sense whatsoever in the NuvaRing cases. Yet, faced with clear evidence that even prescribing physicians didn’t know the real dangers of NuvaRing — not least because Organon and Merck deny those dangers to this very day — the Court somehow went exactly the wrong way.

Maybe the judge will truly reconsider his opinion, or maybe it’ll be straightened out on appeal. Either way, it’s a reminder of just how difficult it is for injured people to obtain civil justice against corporate America.

In 1974, spurned by the collapse of the Studebaker Corporation and the corresponding loss of pension benefits, Congress enacted the Earned Retirement Income Security Act (“ERISA”) nominally “to protect interstate commerce and the interests of participants in employee benefit plans and their beneficiaries” by ensuring the financial stability of employee benefit plans. 29 U.S.C. § 1001(b). Congress’ intentions were good — we’d all like to see pensions protected — but ERISA hasn’t accomplished much in practice.  Just ask the 5,000 people who used to work at Enron, all of whom watched their $2.1 billion in retirement savings go up in smoke, or the fine employees of Hostess, which diverted pension benefits to fund its own operations, only to go bankrupt anyway.

Another purpose of ERISA was to provide “appropriate remedies, sanctions, and ready access to the Federal courts.” 29 U.S.C. § 1001(b). That purpose has failed miserably, the victim of judicial interpretation. Notice in that second link above what the Chair of the American Bar Association’s ERISA and Pension Litigation Subcommittee called the Hostess sham: a “betrayal without remedy.”

The majority of ERISA litigation can be summed up in a single sentence: the plaintiff seeks to avoid ERISA while the defendant seeks to apply it. As Professor Andrew Stumpff described in his  law review article “Darkness at Noon,” since ERISA’s enactment, “the strength of an ERISA plaintiff’s legal position has steadily eroded, to the point where today it is routinely the case that a plan participant can prevail only if he is able to persuade the court that ERISA does not apply to his case.” If the cheated plaintiff — such as a beneficiary improperly denied health insurance coverage from an employer-sponsored plan — can avoid ERISA, they might recover compensation; if they cannot avoid ERISA, then they are typically “without remedy.”

So much for “income security.”

The biggest problem is, just like in pharmaceutical and medical device lawsuits, federal preemption. It’s a one-two punch. First, ERISA “preempts” state laws (like the bad faith claims that insurance beneficiaries can typically bring against insurers who improperly deny coverage, or the breach of fiduciary duty claims investors can typically bring against financial advisors who mismanage investments), so that beneficiaries can’t bring any of the normal claims against employer-sponsored pension and health care plans. Second, ERISA’s built-in remedies are nearly worthless, and everything from investment decisions to health care benefit decisions is reviewed merely for an abuse of discretion, with the ERISA plans allowed to grant themselves the discretion to interpret their own contract language. Metropolitan Life Ins. Co. v. Glenn, 128 S. Ct. 2343 (2008). Under ERISA’s built-in remedies, for example, even when a benefit plan run by the company invests most of the plan’s money in the company’s own stock — which would normally be considered a blatant conflict of interest — the benefit plan is presumed to have acted appropriately.

How did a law intended to protect employees and their families end up shutting the courthouse doors to them?

The problem starts with Congressional drafting.  The expansive but ambiguous text and structure of ERISA has driven many federal courts into fits of disgruntled prose. As Judge Marrero of the Southern District of New York lamented,

In our time, ERISA, as the issues now before the Court illustrate, has, in the relatively brief period of its existence, come to earn the distinction as our modern contender for high rank in the law’s order of obscurity. As one court perceived it, and styled in one of the many other metaphors the statute has inspired to portray its formidable labyrinths, ERISA is ‘a veritable Sargasso Sea of obfuscation.’ Indeed, the Supreme Court itself, laboring through an interpretation of the statute, took the occasion to comment on the ‘unhelpful text and the frustrating difficulty of defining its key term ….’  Undaunted, this Court now offers a contribution to this debate, even if its flicker may be likened to striking yet another match in a black hole, if nothing else, for the value that the instant its time and spark exists may serve in guiding the next bearer of the torch.

Atlantis Health Plan, Inc. v. Local 713, I.B.O.T.U., 258 F. Supp. 2d 284, 288 (S.D.N.Y. 2003)(citations omitted).

Some jurists falsely claim that ambiguity can be resolved by mechanically applying various interpretive canons, but, because different canons suggest differing results, a judge who wants a particular result need only pick the right canon to create that result. Courts have generally filled ERISA’s ambiguous void with decisions that are unfavorable — sometimes outright hostile — to participants and beneficiaries.

Last week, the Supreme Court slanted the playing field even more in favor of employers in their dealings with injured beneficiaries. The facts of US Airways, Inc. v. McCutchen are depressing. James McCutchen was horribly injured in a car accident, suffering between $1 million and $1.75 million in damages, including $66,866 in past medical expenses covered by his health insurance plan sponsored by his employer, U.S. Airways. But there was a problem: the driver had only $100,000 in liability coverage to compensate the four individuals injured in the accident, including McCutchen, all of whom were seriously injured or killed. McCutchen and his wife settled with the driver for $10,000, then settled their underinsurance claim with their own car insurance company for policy limits of $100,000. After subtracting the attorney’s fees, the McCutchens were left with a whopping $66,000 for a serious, life-altering accident. U.S. Airways, in a fit of lazy greed that would make even Gordon Gekko proud, demanded McCutchen pay it back for the whole $66,866 — more than the entire amount McCutchen had collected.

In other words, U.S. Airways paid back its loyal employee for his service by demanding he pay $866 for the privilege of recovering reimbursement U.S. Airways’ medical expenses for it, free of charge, despite the fact that his settlement reflected a mere tenth of his overall lost wages, future medical care, and other damages.

The Supreme Court unanimously said that, under ERISA, U.S. Airways could do that. The Court held that, although ERISA uses the language of trust law throughout it, it doesn’t actually incorporate any principles trust law that might help beneficiaries. ERISA would allows the plan to demand full reimbursement, with no deductions for the inadequate size of the settlement, or for the attorney’s fees. Everyone with an employer-sponsored health insurance plan who wins a personal injury settlement now has to pay for their benefits twice: once by accepting a lower salary in exchange for benefits (a common quid-pro-quo, particularly with large, unionized workforces), then again out of the settlement.

The McCutchens won a small victory: five Justices said that an ambiguity in the language of U.S. Airways plan itself meant that U.S. Airways had to reduce its demand by 40% to pay for the lawyer. The McCutchens thus walk away from their serious accident with a whopping $25,000 or so for James’ serious, permanent injuries, and U.S. Airways gets a windfall of $41,000. But that victory means nothing for the future: employers are already scrambling to amend their ERISA plans to eliminate the ambiguity, so that, in all future cases, they don’t have to reduce their demand even to pay for the lawyer that made the settlement possible.

In practice, what this means is that, every time an injured person goes to a lawyer, one of the first questions will be, “do your get your health insurance through an employer-sponsored plan?” If the answer is “yes,” then we have to dig deep into your medical bills and figure out the size of the lien just to know if it’s worth it for you to file a lawsuit at all. If, for example, a person is seriously injured in a car accident, their health plan pays for $75,000 in care, and there’s less than $125,000 in available insurance coverage, then it’s probably not worth it for them to file a lawsuit at all: between the ERISA reimbursement, attorney’s fees, and costs of suit, the injured person will take home only a trivial amount, even if their injuries are severe, and even if they will continue to need substantial medical treatment.

In a fair legal system, the law would take these issues into account, and would reduce the health plan’s reimbursement from the full $75,000 to a lower amount that accounts for the attorney’s fee (which was necessary to obtain the settlement at all) and for the fraction of the settlement intended to pay for past medical expenses as compared to lost wages, future medical needs, and other damages.

It doesn’t have to be this way. There’s no reason to grant ERISA plans special immunities from the laws that govern normal financial advisors and health care insurers, or special rights that neither Medicare nor private insurers have. Repeal or reform it and let employee benefit plans be governed by the same laws that govern everyone else.

As Judge Posner remarked, “only a lunatic or a fanatic sues for $30,” Carnegie v. Household Int’l, Inc., 376 F.3d 656 (7th Cir. 2004), and that’s because it costs money to seek civil justice. For all the complaints by corporate defendants about the “rising costs of litigation,” those costs are just as frequently — perhaps more frequently — borne by plaintiffs. I’ve had individual wrongful death cases that required hundreds of thousands of dollars in litigation expenses alone, not including attorney and paralegal time.

Here in Philadelphia, the tallest building by far is the Comcast Center, built in part by the enormous profits reaped by way of Comcast’s monopoly power over cable-television services in the area, causing Philadelphia-area consumers to be overcharged by over $875 million from 1998 to 2007, as alleged by the Behrend lawsuit. I was a Comcast customer in that timeframe, and you know how much my individual antitrust claim is worth? Zero. I was personally overcharged no more than $500; the $350 filing fee for my complaint will eat up most of what I could recover, and certainly the remaining $150 in potential damages won’t justify the millions of dollars in litigation expenses and tens of thousands of hours of attorney time I’ll need to invest in the case.

This problem was solved nearly fifty years ago, when Federal Rule of Civil Procedure 23 was amended to create a streamlined procedure for these types of cases. “The policy at the very core of the class action mechanism is to overcome the problem that small recoveries do not provide the incentive for any individual to bring a solo action prosecuting his or her rights.” Amchem Prods., Inc. v. Windsor, 521 U.S. 591, 617 (1997)(internal quotation omitted).

The actual requirements of Fed.R.Civ.P. 23 are not particularly strict. A plaintiff initially needs to show the four requirements of Rule 23(a) are met:

(1) the class is so numerous that joinder of all members is impracticable;

(2) there are questions of law or fact common to the class;

(3) the claims or defenses of the representative parties are typical of the claims or defenses of the class; and

(4) the representative parties will fairly and adequately protect the interests of the class.

Then, the plaintiff needs to show that either Rule 23(b)(1), (b)(2), or (b)(3) is met. Usually the issue is just (b)(2) or (b)(3), so they’re all I quote here:

(2) the party opposing the class has acted or refused to act on grounds that apply generally to the class, so that final injunctive relief or corresponding declaratory relief is appropriate respecting the class as a whole; or

 

(3) the court finds that the questions of law or fact common to class members predominate over any questions affecting only individual members, and that a class action is superior to other available methods for fairly and efficiently adjudicating the controversy.

As an analytical matter, it is not hard to see, for example, how a nationwide employer that refuses to control rampant discrimination by store managers has “acted or refused to act on grounds that apply generally to the class.” It is similarly not hard to see how, in a case alleging a telecommunications monopoly imposed above-market prices in a particular metropolitan area, the questions of that monopoly’s antitrust liability “predominate over” individual questions relating to consumers within the metropolitan area.

But ever since Amchem Prods. and Ortiz v. Fibreboard Corp., 527 U.S. 815 (1999) — both of which were unique nationwide asbestos settlements, and thus not really appropriate cases for re-interpreting class action law in general — Rule 23 has been increasingly interpreted by a slim majority of the Supreme Court in the manner most disadvantageous to plaintiffs, people like you and me.

In Wal-Mart Stores, Inc. v. Dukes, 131 S.Ct. 2541 (2011), a slim majority of the Supreme Court tried to rewrite Rule 23(a)(2), the “commonality” requirement, but it did so in a curious way that, on its face, only applied to the particular case they were reviewing. For the Rule 23(a)(2) question, the majority admitted that “for purposes of Rule 23(a)(2) even a single common question will do,” but “concluded that [these plaintiffs] have not established the existence of any common question.” Given the extraordinary breadth of the Dukes case, and the novel theory, it’s no stretch to say that the Court’s Rule 23(a)(2) holding was limited to that case and highly similar cases. (The Dukes opinion also held that Rule 23(b)(2) doesn’t permit “claims for monetary relief … at least where (as here) the monetary relief is not incidental to the injunctive or declaratory relief,” but that just means monetary claims need to be brought under Rule 23(b)(3)).

The problem is, when a slim majority of the Supreme Court bungles its way through the analysis of a single unprecedented case, it leaves behind a trail of ambiguity that lower courts have to sort out. In the wake of Dukes, for example, the Fifth Circuit interpreted it to impose a whole new means by which courts assess the “commonality” requirement, MD ex rel. Stukenberg v. Perry, 675 F. 3d 832 (5th Cir. 2012), whereas the Seventh Circuit considered Dukes to be an example of a class action that was simply too big and disparate, as “the Court found that there was no unifying motive theory holding together ‘literally millions of employment decisions,’” that commonality “does not mean merely that they have all suffered a violation of the same provision of law,” (quoting Dukes), and that “to satisfy the commonality element, it is enough for plaintiffs to present just one common claim.” Ross v. RBS CITIZENS, NA, 667 F. 3d 900 (7th Cir. 2012)(strangely vacated and remanded, without opinion, in light of Behrend).

The past two months have produced two new opinions on class action certification, one of which (joined by 6 justices) reaffirms the liberal text of the rule, and the other of which (joined by 5 justices) produces yet another “one off” opinion that gives lower courts no useful guidance.

On February 27, 2013, a six-member majority of the Supreme Court (Justices Ginsburg, Roberts, Breyer, Alito, Sotomayor, and Kagan) confirmed in Amgen Inc. v. Connecticut Retirement Plans & Trust Funds, 133 S. Ct. 1184 (2013) how easily the requirements of Rule 23(b)(3) are met:

Rule 23(b)(3), however, does not require a plaintiff seeking class certification to prove that each “elemen[t] of [her] claim [is] susceptible to classwide proof.” Post, at 7. What the rule does require is that common questions “predominate over any questions affecting only individual [class] members.” Fed. Rule Civ. Proc. 23(b)(3) (emphasis added).  …

Because the question of materiality is common to the class, and because a failure of proof on that issue would not result in questions “affecting only individual members” predominating, Fed. Rule Civ. Proc.23(b)(3), Connecticut Retirement was not required to prove the materiality of Amgen’s alleged misrepresentations and omissions at the class-certification stage. This is not a case in which the asserted problem — i.e., that the plaintiff class cannot prove materiality — “exhibits some fatal dissimilarity” among class members that would make use of the class-action device inefficient or unfair. Nagareda, Class Certification in the Age of Aggregate Proof, 84 N. Y. U. L. Rev. 97, 107 (2009). Instead, what Amgen alleges is “a fatal similarity — [an alleged] failure of proof as to an element of the plaintiffs’ cause of action.” Ibid. Such a contention is properly addressed at trial or in a ruling on a summary-judgment motion. The allegation should not be resolved in deciding whether to certify a proposed class. Ibid.

(Bolding added.)

That “fatal similarity” language was music to plaintiff’s lawyers ears: six Justices of the Supreme Court agreed that, if the defendant had one argument it felt could be used to dismiss all of the class members claims, then, as a logical matter, “the questions of law or fact common to class members predominate over any questions affecting only individual members.” Thus, under Amgen, if the defendant says its own defenses would apply to all class members’ claims — which defendants typically do say, to dismiss as many cases as possible — then those same defenses provide grounds for the certification of a class action. Indeed, the more numerous the defense arguments, and the stronger the defendant claims those arguments are, the better the argument for certification.

Then came the baffling opinion in Comcast Corp. v. Behrend, No. 11-864, 2013 BL 80435 (U.S. Mar. 27, 2013). Behrend is the antitrust case I referenced in the beginning of this post, brought by my blogging buddy Barry Barnett at Susman Godfrey. The case is plainly right for class action treatment, given the modest damages to each consumer and the fact that the issues relating to the class as a whole will obviously “predominate” over individual issues: in terms of an antitrust case against Comcast, the differences between me, someone who lived in Chester, Pennsylvania, someone who lived in Cherry Hill, New Jersey, and everybody else who cheers for the Eagles, Sixers, and Flyers are trivial compared to the larger issue of whether Comcast violated antitrust laws in building and exercising its monopoly control of the Philadelphia area.

Yet, a slim majority of the Supreme Court ended up decertifying the Behrend class-action, through tortuous reasoning and a hopelessly botched procedure. Comcast petitioned for certiorari on a question involving the merits of the claim, the Supreme Court granted certiorari on a made-up question relating to the admissibility of expert testimony, held oral argument on that question, and then, when it came time to decide the case, realized that Comcast had already waived the expert testimony issue, and so the Supreme Court rewrote the question again to talk about damages. The Supreme Court then held — in a manner that would impress Joseph Heller — that, because of the complicated appellate path, the plaintiffs had conceded a damages argument that required the class be decertified and remanded for further consideration. It’s almost as if the appeal never happened at all; the Supreme Court decided a phantom issue that no one had raised, argued, or decided until after the argument at the Supreme Court on an entirely different issue.

As Justice Ginsburg wrote in her dissent, “The Court’s ruling is good for this day and case only.” The case should have simply been dismissed from the Supreme Court — as Justice Scalia himself wrote a mere two weeks later (here, on the last page), “The Court thus has no business deploying against petitioner an argument that was neither preserved, see Baldwin v. Reese, 541 U.S. 27, 34 (2004), nor fairly included within the question presented, see Yee v. Escondido, 503 U.S. 519, 535 (1992).”

Now, the inevitable has happened, just as it happened after Wal-Mart Stores, Inc. v. Dukes: District Courts have already misinterpreted the contorted, fact-and-procedure-specific opinion in Behrend to have rewritten Rule 23(b)(3). The good folks at Public Citizen jumped in to help out in one such case in New York. In that case, a wage and hour class action against Applebee’s, the District Court essentially held that employees could never file a wage and hour claims as a class action because each employee would have distinct damages arising from the same illegal conduct.

Unsurprisingly, I agree with everything Public Citizen argues in their brief (e.g., “the Supreme Court did not suggest, and in fact had no occasion to suggest, that a classwide theory of damages was a new threshold prerequisite for certification under Rule 23(b)(3) generally”), but I would also add the Amgen case to the mix. Though one cynical interpretation of Amgen would be to conclude that the Supreme Court approves of class actions that benefit shareholders (Amgen) but not class actions that benefit consumers (Behrend) or employees (Dukes), the Supreme Court certainly didn’t own up to that interpretation.

What the Supreme Court actually held in Amgen was: “Rule 23(b)(3), however, does not require a plaintiff seeking class certification to prove that each element of her claim is susceptible to classwide proof.” (Emphasis in original.) Indeed, Amgen held that “predominance” can be shown either through the plaintiff’s proof of “similarity” or through the defendant raising a “similar” defense as to all plaintiffs.

That, to me, seals the deal. Unless you want to take the purely cynical interpretation of Amgen, Behrend, and Dukes, then Behrend didn’t actually change Rule 23(b)(3). It was, as Justice Ginsburg argued, a ruling good for that day and case only. We can only hope the lower courts correctly interpret it that way.

“Social media law” is all the rage these days, and it’s not hard to see why: employers across the country are desperate to use social media to promote their brands or to rid themselves of undesirable employees, as the case may be. 2012 was the first year that really produced anything like a solid body of law to be analyzed as the first wave of social media lawsuits produced court opinions and a handful of legislatures began to address the issue.

A recap is in order. I don’t profess to be an expert on social media law — Google tells me there are over 194 million “social media lawyer” pages, though most everything you could need would be on MoFo’s Socially Aware, or Eric Goldman’s blog, or Bradley Shear’s blog — but the big trends aren’t hard to spot. Three of those trends jumped out at me:

First, the National Labor Relations Board issued several memoranda last year noting that both union and non-union workers had a right to discuss working conditions without fear of retaliation, including on social media websites, a policy the NLRB has already enforced to restore the jobs of workers fired for negative remarks about their employer on Facebook and Twitter. (Then came the judicial atrocity of Canning v. NLRB, which has thrown into doubt everything the NLRB has done since January 2012, so who knows what the eventual fate of those policies will be.)

Second, a couple of state legislatures have stepped in to stop the odious practice of employers demanding the usernames and passwords of potential employees, to snoop for embarrassing information. Eric Goldman and Venkat Balasubramani have raised concerns about these laws (Eric here, Venkat here), not (I hope) because they think employers should be snooping around their employee’s private lives, but primarily on the grounds that the law can create problems where employees end up using their social media accounts for “mixed” personal and business purposes. More on that in a moment.

Third, several lawsuits involving Twitter, Facebook, and LinkedIn accounts that were either — depending on which side you credit — personal accounts hijacked by the employer after the employee was left, or business accounts stolen by the employee after the employee left, produced court opinions. Venkat’s post above links to his various discussions of each, but for the moment there aren’t really any clear rules of law other than, in essence, everybody (employers and employees) should pay attention to their employment policies and should figure this issue out in advance.

The “mixed” personal and business social media accounts are what prompted this post. A family friend of our’s was recently given a “training” at work that consisted of a variety of saccharine management slogans on PowerPoint slides — e.g., “The Smartest Person in the Room is the Room,” a phrase that impressively bollixes up every noun and adjective within it — plus a not-so-subtle indication that the employees were all expected to set up quasi-personal Twitter accounts and start “engaging” with others for the benefit of the employer. It’s not the first time I’ve seen an employer imposing Facebook and other social media requirements.

And that’s where at least two problems arise. One problem relates to the ownership of these accounts if the employee leaves, the issue that has been playing out the cases discussed by Eric and Venkat. The other problem relates to an issue larger than just social media: employers’ increasing demands that employees devote their off-time to communications for the employer’s benefit.

I wrote a couple months ago about some of the successes in 2012 in wage-and-hour class actions, most of which involved, unsurprisingly, businesses asking their rank-and-file employees to work more than normal hours, often without paying overtime, sometimes without paying at all. One of the hottest — or should I say most heavily litigated — areas of wage-and-hour work these days involves “remote work,” including employer requirements that employees be available by e-mail beyond normal business hours.

As two employer defense lawyers at Ogletree Deakins summarize, the most commonly litigated off-the-clock work violations caused by e-mail access, cell phone availability, and the like include “remote communications by non-exempt employees” and “being required to check or respond to voice mails or e-mails before or after an employee’s regularly-scheduled workday commences or ends.” As they conclude,

It is not unlawful for non-exempt employees to perform these activities outside their normally scheduled hours. What is unlawful is for non-exempt employees to perform these principal activities without the time being properly recorded and paid in accordance with minimum wage and overtime laws.

Indeed, and that brings us back to all the Twitter, Facebook, LinkedIn, Google+, and Pinterest accounts that employers are now telling all of their employees to set up and use to give their employers free, personalized marketing. It seems some employers are starting to learn not to claim ownership over the employee’s social media accounts, which is good, but many have adapted by trying to coerce the employee’s into keeping the account as a “personal” account that is then expected to be used for the employer’s marketing.

Which is lawful if we’re talking about a corporate executive, or a learned professional, or a computer professional, or some other employee “exempt” from overtime requirements under the Fair Labor Standards Act. (Note that not everyone who uses a computer is a “computer employee” under the Fair Labor Standards Act, see Martin v. Ind. Mich. Power Co., 381 F.3d 574, 580 (6th Cir. 2004), holding computer professional’s work requires “theoretical and practical application of highly-specialized knowledge in computer systems analysis, programming, and software engineering”).

But for rank-and-file white collar workers, if the employer wants to add to their duties and demand more of their time — like claiming ownership to the employee’s whole personality by demanding the creation and use of a social media profile — then they’re going to have to pay for it.

Ken over at Popehat has been chronicling the implosion of Prenda Law, a law firm that, on paper, represented copyright holders (particularly of adult films) suing individuals who had shared the films online. I would not dare try to summarize Ken’s comprehensive coverage, nor claim any direct knowledge of the facts, other than to point out the handful of allegations against the firm — and their tactical response — that prompted this post. Allegedly, Prenda Law’s “clients” were merely shells for the lawyers themselves (a fraud on the court), and the firm allegedly forged someone’s signature on corporate documents to create the appearance of a legitimate attorney–client relationship. The federal judge overseeing a number of lawsuits caught wind of this and held a sanctions hearing yesterday, in which essentially everyone associated with Prenda Law asserted their Fifth Amendment right against self-incrimination, and so did not testify.

That’s the issue I wanted to pick up for this post: the ramifications of asserting the Fifth Amendment right against self-incrimination in civil litigation. As a bonus, we’ll discuss what an adversary can do to maximize the negative impact of that assertion on their opponent. The issue comes up more often than you’d think; we see it frequently in egregious wrongful death cases (where the defendant is trying to avoid a manslaughter prosecution), drunk driving cases, and (obviously) fraud cases. I have a handful of civil cases now where the opposing party has either already asserted the Fifth or is expected to do so.

The Fifth Amendment says that “No person. . . shall be compelled in any criminal case to be a witness against himself.” As the Supreme Court has long held, “The privilege afforded not only extends to answers that would in themselves support a conviction under a federal criminal statute but likewise embraces those which would furnish a link in the chain of evidence needed to prosecute the claimant for a federal crime.” Hoffman v. United States, 341 U.S. 479, 486-487 (1951). There are rare circumstances in which a judge can deny the privilege and then compel the testimony, but that’s highly unusual. Once you assert it, your refusal to testify cannot be used against you in criminal proceedings.

But two problems remain for civil cases. 

First, the privilege isn’t boundless, and it doesn’t prevent prosecutors (or adversaries in civil litigation) from finding the same evidence elsewhere. “A party is privileged from producing the evidence, but not from its production.” Justice Holmes, Johnson v. United States, 228 U.S. 457 (1913). The first place to look: corporate records. The right against self-incrimination is a personal privilege that does not extend to a corporation or its records. Bellis v. United States, 417 U.S. 85, 89-91 (1974)(Bellis, it should be noted, held that a lawyer couldn’t withhold his law firm’s documents, even if those documents would tend to incriminate him). Further, a corporate record custodian may not resist a subpoena on the grounds that the contents of the documents would be personally incriminating. See Braswell v. United States, 487 U.S. 99, 110 (1988)(there remains, however, an open question where the “custodian” is also the sole employee and officer of the corporation).

So all those entities ‘affiliated’ in one way or another with Prenda Law can expect some subpoenas coming their way, perhaps as part of the discovery by some of the people they sued into whether they violated Federal Rule of Civil Procedure 11 with their alleged misrepresentations.

Second, although in a criminal procedure, the court must instruct the jury that it cannot draw an inference of guilt from a defendant’s failure to testify about facts relevant to his case, Griffin v. California, 380 U.S. 609 (1965), in civil cases, “the Fifth Amendment does not forbid adverse inferences against parties to civil actions when they refuse to testify in response to probative evidence offered against them.” Baxter v. Palmigiano, 425 U.S. 308, 318 (1976).

The rule under Baxter is akin to Cicero’s maxim, “Though silence is not necessarily an admission, it is not a denial, either.” That is to say, an opposing party can’t simply point to the silence and claim victory in their civil case, but a court is entitled to draw adverse inferences against the party that “pleads the Fifth.” (Justice Brandeis said: “Silence is often evidence of the most persuasive character.” United States ex rel. Bilokumsky v. Tod, 263 U.S. 149 (1923)). Thus, pleading the Fifth in a civil case in federal court is never helpful, is rarely harmless, and is typically very damaging — indeed, it’s often fatal to the party’s claims or defenses.

There’s an interesting split among the federal Courts of Appeal as to when and how a party may use the silence in their favor. For example:

• In re Carp, 340 F.3d 15, 23 (1st. Cir. 2003)(“When all is said and done, the trial court has discretion over whether a negative inference is an appropriate response to the invocation of the Fifth Amendment in a particular civil case.”).
• Stichting Ter Behartiging Van de Belangen v. Schreiber, 407 F.3d 34, 55 (2d Cir.2005) (“Even assuming that a jury might draw [an adverse inference from asserting the privilege against self-incrimination], however, we are required at summary judgment to draw all reasonable inferences in favor of the nonmoving party[.]“);
• SEC v. Graystone Nash, Inc., 25 F.3d 187, 192 (3d Cir.1994)(“Because the privilege [against self-incrimination] is constitutionally based, the detriment to the party asserting it should be no more than is necessary to prevent unfair and unnecessary prejudice to the other side.”).
• The Ninth Circuit has been particularly active on this front: SEC v. Colello, 139 F.3d 674, 677-78 (9th Cir. 1998) (holding that district court did not err in drawing an adverse inference against defendant based on his Fifth Amendment invocation in a summary judgment proceeding because there was “additional evidence” to support the SEC’s case);  Doe ex rel. Rudy-Glanzer v. Glanzer,232 F.3d 1258, 1264-65 (9th Cir.2000)(“The Baxter holding is not a blanket rule that allows adverse inferences to be drawn from invocations of the privilege against self-incrimination under all circumstances in the civil context”); SEC v. Jasper, 678 F. 3d 1116, 1126 (9th Cir. 2012) (“Jasper has no legal support for the proposition that a district court must make its evidentiary rulings and tailor its adverse inference instructions on a “question-by-question basis.” … But Jasper has no warrant for treating every individual question as an “instance where the adverse inference was drawn” under Glanzer. As properly instructed, the jury could have concluded that the sum total of his Fifth Amendment invocations supported the adverse inference against him.”)
• SEC v. Smart, 678 F. 3d 850, Fn 8 (2012) (10th Cir. 2012)(noting the Stichting and Colello split, and deciding it did not need to resolve the conflict)

One interesting point of particular relevance to Prenda Law: As Ken notes in his post summarizing the available sanctions, when a judge notices misconduct in their court, one tool they have available is the ability to refer matters to the attorney’s state bar association. Can the silence be used against them in a disciplinary proceeding? Well, there’s a case on that in the First Circuit, involving an attorney who fraudulently concealed property during a bankruptcy, then asserted her right against self-incrimination: “While refusal to waive the Fifth Amendment might increase the risk that she would be disbarred, disbarment would not result automatically and without more. Hence, she was not threatened with a penalty within the meaning of [Garrity v. New Jersey, 385 U.S. 493 (1967)] for invoking her Fifth Amendment privilege.”

Thus, under federal law, a bar association can use the assertion of the Fifth Amendment against an attorney in a disciplinary action, so long as disbarment isn’t automatic, but some state laws preclude their state courts from drawing negative inferences against a party who asserts a privilege and refuses to testify. As two corporate defense lawyers at Gibson Dunn noted back in 2010, several states have statutes or rules of evidence that forbid courts from drawing adverse inferences after a party asserts a testimonial privilege. See, e.g., Alaska R. Evid. 512(c); Ark. R. Evid. 512; Cal. Evid. Code § 913(a); Del. R. Evid. 512; Haw. Rev. Stat. § 626-1, R. 513; Idaho R. Evid. 512; Ky. R. Evid. 511; N.D. R. Evid. 512; Nev. Rev. Stat. § 27-513; Nev. Rev. Stat 49.405; N.J. R. Evid. 532; N.M. R. Evid. 11-513; Okla. Stat. Ann. §2513; Or. Rev. Stat. § 40.290; Vt. R. Evid. 512. In those states, the court has to tell the jury to not use the silence against the party. I’m sure Cicero wouldn’t approve, but those are issues for another day, and they’re state-specific.

Yet another interesting question is when the adverse inference may be used to break through attorney–client privilege by way of the crime–fraud exception, and force an attorney to disclose communications with the client, over the client’s objection. The Southern District of New York tore through that one back in February: “Stern invoked his privilege against self-incrimination in response to nearly every question asked of him during his deposition. By refusing to answer any questions, Stern obstructed the discovery process, which justifies drawing an inference that any answers he gave in response to the questions would have been unfavorable to him. … Accordingly, plaintiff will be permitted to draw adverse inferences against Stern to support its efforts to invoke the crime/fraud exception.” The Court then used those negative inferences to find the crime–fraud exception likely applied.

Now, the question for a lawyer is, when an opposing party asserts their right against self-incrimination, what do you do? You can move on to another subject, but that’s not the right way to do it. When a party asserts the Fifth, you make them dig as deep and as wide a hole as you can, asking as many specific questions as possible to prompt the assertion of the privilege. That way, you can both (a) examine the contours of the asserted privilege, to see if it is being asserted improperly and (b) develop a thorough record on every issue upon which you are seeking an adverse inference. The more “I plead the Fifth” answers you get, the better.

If you’re curious for more background on the right against self-incrimination and its relationship to civil cases, see this thorough article by Andrew Schulman.

Yesterday, the Supreme Court unanimously held in Millbrook v. United States that 28 U.S.C. § 2680(h) — the statute that permits lawsuits against “investigative or law enforcement officers of the United States Government” for claims arising “out of assault, battery, false imprisonment, false arrest, abuse of process, or malicious prosecution” — means just what it says, reversing nearly thirty years of law in the Third Circuit. So why did the Supreme Court have to tell us that a statute meant what it obviously meant?

The case arose from a prisoner in the United States Penitentiary in Lewisburg, Pennsylvania, who alleged “that he was taken to the basement of the SMU and forced to perform oral sex on Correctional Officer Pealer while Correctional Officer Edinger held his neck and Correctional Officer Gimberling stood watch by the door.” “SMU” stands for “Special Management Unit”; if you’ve ever watched a movie or TV with a prison in it, you know SMU as “the hole.”

Millbrook alleged he was assaulted, battered, and falsely imprisoned by three law enforcement officers of the United States. Under § 2680(h), there’s not much more to ask about the case: his claim was exactly the sort of claim Congress sought to permit when it amended the Federal Tort Claims Act in 1974 in response to a disturbing rise in “no knock” raids that destroyed homes and even killed people — without even probable cause or a warrant, as required by the Fourth Amendment. (It’s a couple years old now, but this long report from Radley Balko on the rise of paramilitary raids by domestic law enforcement is essential reading — sadly, the problem has gotten much worse in the past 40 years.) The law means, quite simply, that the United States is liable when investigative or law enforcement officers of the United States Government commit those specific intentional torts in the scope of their employment.

In the years since the Act’s passage, the courts have been busy eviscerating it by granting the government and its employees an increasing amount of immunity. In 1986, the Third Circuit decided in Pooler v. United States, 787 F.2d 868, 872 that  § 2680(h) was limited to claims where the “investigative or law enforcement officers” were “executing a search, seizing evidence, or making an arrest.” The Third Circuit reasoned: 

We read the 1974 amendment to section 2680(h) as addressing the problem of intentionally tortious conduct occurring in the course of the specified government activities. It is in the course of such activities that government agents come most directly in contact with members of the public. The government places them in such a position, thereby exposing the public to a risk that intentionally tortious conduct may occur. That Congress intended to deal only with conduct in the course of a search, a seizure, or an arrest is confirmed by the sparse legislative history of the 1974 amendment. The Senate Report on the amendment states that the proviso was enacted to provide a remedy against the United States in situations where law enforcement officers conduct “no-knock” raids or otherwise violate the fourth amendment.

Reading the intentional tort proviso as limited to activities in the course of a search, a seizure or an arrest as a practical matter largely eliminates the likelihood of any overlap between section 2680(a) and section 2680(h).

Id. Their reading of the Senate Report is plainly wrong, which is likely why they didn’t bother to actually quote it. The Report said:

The effect of this provision is to deprive the Federal Government of the defense of sovereign immunity in cases in which Federal law enforcement agents, acting within the scope of their employment, or under color of Federal law, commit any of the following torts: assault, battery, false imprisonment, false arrest, malicious prosecution or abuse of process

(The Senate Report is quoted in Sami v. United States, 617 F. 2d 755, 764 (D.C. 1979).) The rest of the Third Circuit’s analysis didn’t make any sense, either: what made the Court believe that Congress wanted to limit the claim to where “government agents come most directly in contact with members of the public,” or that Congress wanted to “eliminate[ ] the likelihood of any overlap between section 2680(a) and section 2680(h)”?

But, under the doctrine of stare decisis, once a court makes a bad decision, later courts are entitled to apply that same decision without thinking twice about it, which is how both the Middle District of Pennsylvania and the Third Circuit blindly applied Pooler without bothering to consider whether Pooler was right in the first place. The first point that anyone in the case (other than Millbrook) started really thinking about the case was last December, when the Solicitor General realized that the Pooler interpretation was so wrong they couldn’t even defend it.

Yesterday’s opinion from the Supreme Court, written by Justice Thomas, completes the process, reversing dozens of prior cases applying the Pooler rule (or another Circuit’s equivalent) to shut the courthouse doors on people just like Millbrook who alleged they were intentionally hurt by U.S. government agents. I suppose we should be glad “better late than never,” a cold comfort for those whose cases were summarily dismissed, or who told — correctly — by lawyers that they shouldn’t even bother to file a lawsuit.

The extraordinary course of this case deserves mention, as it perhaps holds an important lesson for the way the Supreme Court conducts business. Millbrook filed his case pro se, appealed pro se, then filed for Supreme Court certiorari pro se. The Supreme Court grants far fewer than 1% of the petitions for certiorari it receives, and grants even fewer pro se certiorari petitions — yet, in this case, the Court not only granted the petition, but reformed the question presented to reach the question that best benefitted Millbrook. The Court then appointed counsel for him and, eventually, counsel to defend the Third Circuit’s position when the United States refused to do it, and, importantly, both of the lawyers appointed to represent both sides of the case formerly clerked for Justice Alito.

Why is that important? We don’t how the case was chosen for certiorari, nor how the lawyers were appointed. But we do know that Justice Alito is the only Justice who doesn’t participate in the “cert pool,” the process by which petitions for certiorari are read by a single clerk, who prepares a short memo for all of the Justices. Justice Alito, however, has his own clerks review every petition for certiorari — and we may have just seen the practice of having more than one reviewer pay off, so to speak, if it was his clerks who were able to spot a diamond in the rough, a pro se petition raising a legal error from Justice Alito’s home circuit. Perhaps the Justices should consider revamping the way cert petitions are reviewed — the more eyes, the better.

Via Overlawyered*, I saw a new article in an Austin, Texas paper titled, “Texas trial lawyer eyes New York storm cases”:

[Trial lawyer Steve] Mostyn sees potential riches on the horizon. The lure of New York, and all those insurance claims spawned by the destructive wrath of Superstorm Sandy, is irresistible for an ambitious litigator with political connections, piles of money and a fearsome reputation.

Mostyn — 41 years old with a shaved head, steely blue eyes and linebacker physique — plans to move much of his Houston-based Mostyn Law Firm to New York City soon, with dreams of landing about 10,000 cases worth more than $1 billion in insurance claims from the storm that pummeled the Northeast last October.

You can imagine where the rest of the article goes from there, and it’s worth a read just to see Professor Anthony Sebok’s understated response to Mostyn’s claim that he wants to take on $1 billion in disputed Hurricane Sandy insurance claims. I haven’t a clue who Mostyn is; he could be the best insurance bad faith lawyer in Texas for all I know. I want to focus on two critical pieces of the article that tell a lot about the sorry state of insurance policyholder’s rights in New York and New Jersey.

But Mostyn already has fans, like Carleanne Fierro, 51, a swim club owner from Pound Ridge, N.Y., whose house was damaged and is glad to know the hulking Texas lawyer is coming. Fierro, who lives in a town about 13 miles from Long Island Sound and 40 miles from Manhattan, said she quickly became frustrated seeking help with her claims from New York lawyers. “They don’t know how to handle this,” she said. “I think you need an expert. I think you need someone who is familiar with wind damage.” When she found Mostyn’s firm, she signed a contract quickly. “It is worth the 40 percent just for someone to listen to my story and be kind to me,” she said.

Back in Austin, a political foe of Mostyn, state Sen. Larry Taylor, R-Friendswood, shook his head when he heard about Mostyn’s plan to enter New York. “It’s the new thing,” Taylor said. “It’s the new cash cow.”

Let’s stop and think about that for a second: how is a lawyer from Texas able to walk into New York and start charging a 40% contingent fee on a “cash cow” claim? Why did Ms. Fierro have trouble finding someone to handle her insurance claim? It’s not like there’s a shortage of trial lawyers in the Mid-Atlantic States.

Certainly, Hurricane Sandy wrecked havoc on the East Coast, and as someone who regularly deals with insurance companies (and who grew up on Hurricane Alley down in the South), I have no doubt the insurers have taken a hard line on the claims to avoid shelling out billions of dollars to homeowners and businesses. That’s how, despite the fact that an extraordinarily devastating storm hit one of the most populous and wealthy areas in a country in 2012, the reinsurance industry still turned a healthy profit.

It has been widely reported that 93% of New Jersey homeowner’s claims have been “closed,” but that doesn’t mean the homeowner agrees with the result — if an adjuster said a house with the roof blown off and some water in the basement was destroyed entirely by a “flood,” then that counts as a “closed” claim. The State of New Jersey has already taken some grief in the press for how it keeps insurance data under wraps. There’s every reason to believe insurers up here are doing the same things insurers do in the South after a hurricane: offer the policyholder half of what they deserve, then claim the damage was “flooding” or “fraud” if the insured doesn’t take it.

But, back to our original question — why don’t you see New York City lawyers falling over themselves to get Hurricane Sandy insurance claims in the NYC, on Long Island, and down the Shore the same way, for example, they fall over themselves to get construction injury claims?

It’s because insurance bad faith claims in New York and New Jersey are not a “cash cow.” They’re risky and difficult cases that usually pay poorly, and often don’t pay at all. As I’ve written before, if something was easy for plaintiff’s lawyers to do, everyone would be doing it — if lawyers could just take Sandy insurance claims and make a ton of money off them, an unknown lawyer with his principal office 1,700 miles from New York City wouldn’t have a chance breaking into the Hurricane Sandy claims market, certainly not with a 40% fee.

Litigating against an insurance company is like litigating against the government: they have essentially unlimited resources, a phalanx of experienced lawyers, and, because every they spending someone else’s money (taxpayers’ or insureds’, respectively) to defend the case and pay any judgment against them, no incentive whatsoever to settle. They can, and do, litigate cases forever.

In recognition of this problem when it comes to cases against the government, our federal civil rights laws (specifically, 42 U.S.C. § 1988, which applies to several civil rights claims, including the most common one, the 42 U.S.C. 1983 claim) allows the award of “a reasonable attorney’s fee” if the plaintiff wins, even if their success is limited. Hensley v. Eckerhart, 461 U.S. 424, 435 (1983). The attorney’s fee thus both gives plaintiff’s lawyers an incentive to take meritorious claims, and gives the government an incentive to settle the claims more promptly, because the plaintiff’s fees will only get higher as the case goes on.

Suing an insurance company can be even worse than suing the government, because, while the government generally doesn’t pay as a result of bureaucratic recalcitrance, the insurance companies actively strategize ways to thwart claims. In recognition of the challenges of insurance litigation, federal insurance laws — i.e., ERISA, which covers employer-sponsored health, life, and disability insurance plans — provide for an award of attorney’s fees in the court’s discretion if a party has achieved “some degree of success on the merits.” Hardt v. Reliance Standard Life Ins. Co., 130 S. Ct. 2149 (2010).

The attorney’s fees statutes create an incentive for attorney’s to bring these challenging claims against governmental and insurer defendants with essentially unlimited resources and time to wrongfully deny meritorious claims. That’s why in many states, like Pennsylvania, policyholders who win bad faith claims against insurance companies can recover attorney’s fees.

New York and New Jersey, however, do not permit policyholders to recover attorney’s fees when they win insurance bad faith lawsuits. (As Gene Killian notes, there’s a bill pending in New Jersey to fix that.) They generally do not even permit policyholders to recover damages beyond the value of the claim itself, like consequential damages to a policyholder’s business and income. (New York recently allowed a limited exception to that for business interruption insurance.) The situation is so bad that most lawyers aren’t talking about insurers — no matter how bad their conduct — but rather suing brokers for failing to properly inform policyholders just how awful their coverage was.

The end result is that a plaintiff’s lawyer considering taking on an insurance bad faith case in New York or New Jersey has a lot to lose (because the lawyer could invest five-or-six-figures into the case as expenses, plus hundreds of hours) yet can at best only recover the face value of the claim.

Hence, most trial lawyers don’t even want most of the Hurricane Sandy insurance claims. They’re too difficult and expensive, and with damages that are too low, to warrant the risk — unless, that is, you already have an entire bureaucracy in place to handle hurricane claims, plus a number of experts / engineers / investigators you can rely on, as it seems Steve Mostyn might already have given the volume of his Hurricane Ike claims.

So that, in a nutshell, is why a Texas lawyer can come to the East Coast charging a 40% contingency fee for Hurricane Sandy claims: because New York and New Jersey’s laws are so unfriendly to policyholders that local lawyers won’t take the claims.

That reality makes this quote in the article all the more appalling:

Thomas Stebbins, executive director of Lawsuit Reform Alliance of New York, said he was troubled — though not surprised — to hear that out-of-state lawyers would converge on New York because of its lax tort laws. “We’re disappointed when we see someone trying make a buck out of a tragedy,” Stebbins said.

Indeed, we’re all disappointed by that — which is why I hope Mr. Stebbins calls up those insurance companies that fund the Lawsuit Reform Alliance and tells them to evaluate their policyholders’ claims fairly and and to pay them promptly. After all, the only way Steve Mostyn can make a dime is if he proves the insurance companies cheated their insureds; if the insurers and their public relations groups are so concerned about policyholders being taken advantage of by trial lawyers, why not just pay the claims in the first place?

* I appreciated the sly Christopher Guest reference in Overlawyered’s post.

Related post of mine: Was Hurricane Sandy (Legally) An Act of God?

This week’s U.S. Supreme Court argument in Bartlett v. Mutual Pharmaceutical (link goes to my thoughts on the case, which I posted back in December) has taken the issue of “impossibility preemption” for a brief stroll through the rest of the legal world, crossing paths with some major news outlets. Karen Bartlett was given a shot of a pain reliever, sulindac, which caused her to develop Stevens-Johnson Syndrome and toxic epidermal necrolysis so severe her burn surgeon called it “hell on earth.” There would be a handful of legal avenues available to her if she had received the brand-name drug, but, because she received a generic, there’s the looming question as to whether her State tort law lawsuit is “preempted” under the Supreme Court’s 2011 case, PLIVA v. Mensing.

A brief refresher. There are four types of “preemption,” so named when federal law trumps — i.e., “preempts” — state law.

1. Express Preemption is when Congress and the President pass a law that says States’ law on the issue are unenforceable. For example, the preemption clause of ERISA, 29 U.S.C. § 1144, “the provisions of this title … shall supersede any and all State laws insofar as they may now or hereafter relate to any employee benefit plan …”

2. Impossibility Preemption is when Congress has not passed any law preempting State law, but “where compliance with both federal and state regulations is a physical impossibility for one engaged in interstate commerce.” Florida Lime & Avocado Growers, Inc. v. Paul, 373 U.S. 132, 142-143 (1963).

3. Conflict Preemption occurs where Congress hasn’t passed a law preempting State law, and where it’s possible to comply with both, but “under the circumstances of [a] particular case, [state] law stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress.” Hines v. Davidowitz, 312 U.S. 52, 67 (1941).

4. Judicial Activism Preemption happens when a judge, or the majority of judges on a federal appellate court, don’t like a particular State law and so make up a reason to get rid of it. No, the courts themselves don’t call it that, they typically call it “impossibility preemption.” This is my term for it.

In the Bartlett case, just like in every other pharmaceutical liability case, there’s no express preemption. In the 80 years since the passage of the Federal Food, Drug, and Cosmetic Act in 1938, Congress has never once saw fit to preempt State law lawsuits against brand-name or generic drug manufacturers.

In 2011, a slim majority of the Supreme Court in PLIVA, Inc. v. Mensing, 131 S. Ct. 2567 (2011) applied what I call Judicial Activism Preemption under the guise of impossibility preemption, and made up a reason to blow up the majority of lawsuits against generic drug manufacturers. I wrote more about it here. Law professor Leslie Kendrick recently wrote about how problematic impossibility preemption is in the conduct of pharmaceuticals in general.

Mensing involved a “failure to warn” claim — i.e., an allegation that the drug’s warning labels didn’t adequately disclose the drug’s real risks — and the Supreme Court held those claims were preempted. Bartlett on the surface involves a pure strict liability claim — i.e., a claim that the drug is simply unreasonably dangerous given the minor benefits it has compared to the serious risks — and then in the details involves a number of complicated factual and legal issues, including the strange decision by the defendant to waive most of its defenses, complicated issues that, to me, should have caused the Supreme Court to decline the case for consideration.

Be that as it may, the oral argument (transcript here) revealed a lot about the true nature of preemption and the Justice’s thoughts.

First, Justice Alito prompted the generic drug company’s lawyer to admit that there would be no “impossibility” preemption under a “pure” Second Restatement strict liability rule (I’ve advocated for pure strict liability here in Pennsylvania):

JUSTICE ALITO: Suppose that New Hampshire had a real strict liability regime, so that you — you sell a drug, and whether it’s unreasonably dangerous or not it causes an injury, you pay, to spread the costs. Would there be a problem with that?

MR. LEFKOWITZ [the appellate lawyer for Mutual Pharmaceuticals: Justice Alito, I think if we had what would really be an absolute liability scheme, I think is really what you are suggesting, something similar to the kind of vaccine compensation program that we heard about this morning, that would not raise impossibility preemption problems at all. It might or might not raise obstacle issues; it would depend perhaps on the scope of the program, whether it was singling out certain types of drugs, how expensive it was; but that would be a very different situation.

Interestingly, both Justice Kagan and Justice Roberts later appeared to agree that the question at the heart of impossibility is whether the State requires something different, not whether the State makes a defendant pay compensation for its actions:

JUSTICE KAGAN: But, Mr. Lefkowitz, I think in describing the FDCA just now, you used the word "authorizes," and typically, when we think about impossibility, it's not enough that a State law penalizes what Federal law authorizes. What we -- something is impossible when a State law penalizes what Federal law requires or maybe -- or, where State law penalizes what Federal law gives you a right to do. But it's not enough for impossibility that State law penalizes what Federal law permits.

 

And it seems as though what we have in the FDCA is a statute that authorizes, that says, you can sell this. But it doesn't say you must sell it, and it doesn't give you a right to sell it.

 

...

CHIEF JUSTICE ROBERTS: ... Our cases are focused on the concern that the State is going to impose on the manufacturer a different duty than the Federal government.

 

That's not what's going on in a strict liability regime. They're saying, we're not saying you should have a different structure, we're not saying anything about warning; we're saying if you do this, you're going to have to pay for the damage. It's not -­ it's not a different duty. And I think that's what's underlying the argument that, well, you can just stop selling, because you don't have to adjust how you're going to make the drug. You understand that it's going to be the same as the Federal drug, but our system is, you pay for the damage.

It’s refreshing to see Justice Alito and Justice Roberts, both of whom were in the majority in PLIVA v. Mensing, recognizing that the word “impossibility” isn’t a magical incantation the defendant can utter and then avoid liability. For “impossibility” preemption to imply, the State needs to pass a law that forces a defendant to do something different from what the federal law requires. It can’t merely be that the State forces the defendant to pay compensation — that's like saying State-issued speeding tickets make interstate trucking by federally-licensed companies "impossible."

Of course, no Supreme Court argument would be complete without some input from the resident troll who, by way of the single "question" he asked, advocated forcefully for Judicial Activism by disparaging the merits of trial by jury:

MR. FREDERICK [the appellate lawyer for Karen Bartlett]: What the State law is seeking to do here, Mr. Chief Justice, is to impose liability where there is proof of an unreasonably dangerous product. That unreasonable danger entails evidence of a risk/benefit analysis that looks at the overall risks to the population against the overall benefits that are provided for the drug.

JUSTICE SCALIA: The jury decides all of this, right?

MR. FREDERICK: That’s correct.

JUSTICE SCALIA: That’s wonderful. Twelve — twelve tried men and few — and true [who?] decide for the whole State what the — what the cost/benefit analysis is for a very novel drug that unquestionably has some deleterious effects, but also can save some lives.

And the jury’s going to decide that?

MR. FREDERICK: Yes, it is.

I know Justice Scalia has been busy writing books about how to read laws, but, given his sarcastic remarks about the utility of juries, perhaps he would do well to re-read this sentence:

In Suits at common law, where the value in controversy shall exceed twenty dollars, the right of trial by jury shall be preserved, and no fact tried by a jury, shall be otherwise re-examined in any Court of the United States, than according to the rules of the common law.

It’s been in the Constitution for a while now.

Patent trolls are back in the news again, primarily as a result of the re-introduction of the “Saving High-tech Innovators from Egregious Legal Disputes” Act. (As The Register notes, the “SHIELD Act” is “risibly backronymed.”) Yesterday, the United States House of Representatives Subcommittee on the Courts, Intellectual Property and the Internet held a hearing on “abusive patent litigation.” I would say their heart was in the right place, but, in typical congressional committee fashion, rather than host a forum at which worthy ideas could be debated for the benefit of society, the subcommittee called four management-level lawyers at Fortune 500 companies, one lawyer from a multi-billion-dollar private company that provides software to most of the Fortune 500, and one lawyer from a litigation firm that touts its success representing Fortune 500 companies.

The SHIELD Act was first introduced last fall and it was, to be frank, useless. The original SHIELD Act would have forced plaintiffs to pay the defendants’ attorney’s fees if the defendant could show the plaintiff “did not have a reasonable likelihood of succeeding.” That sounds all well and good, except that the primary problem with our current patent system is not that plaintiffs are filing wholly-frivolous lawsuits (i.e., where there’s no chance of proving infringement), but that patents are granted way too easily, and then cost too much to invalidate. “A reasonable likelihood of succeeding” is a meaningless phrase — indeed, what better indication of the “reasonableness” of a patent infringement lawsuit could there be than the existence of a valid patent granted by the patent office?

The revised SHIELD Act (copy available via the EFF at this link) makes far more sense. Instead of attacking purely frivolous claims — which simply aren’t the problem — the SHIELD Act has an elegant solution to the patent troll problem: to maintain an infringement lawsuit, the plaintiff must be able to show it is engaged in “a substantial investment… in the exploitation of the patent through production or sale of an item covered by the patent.”

If enacted, the bill would end the practice of companies buying patents and then enforcing them against others without bothering to do anything with the patent themselves. Patent protection exists to protect legitimate inventors trying to utilize their patents, not to enrich shell companies unwilling to take on the risk of making a product that actually uses the invention. The revised SHIELD Act would be a step in the right direction, but it has three big exceptions that render it toothless in most cases. Moreover, it fails to attack the primary problem with patent lawsuits these days: the lopsided cost of pursuing a patent lawsuit to defending one, which gives the holders of weak patents the power to extract sub-million-dollar settlements without their patents actually being tested in court. 

Starting with the exceptions, the bill wouldn’t impose the same “substantial investment” requirement on inventors, their assignees, or any “university or technology transfer organization.” Why should any of these entities have a special license to troll businesses with patents they aren’t bothering to use themselves? Is there some special value to society by letting institutions of higher education thwart research, development and investment elsewhere by sitting on patents and filing lawsuits?

But the bigger problem to me is the lack of any changes to the nature of patent infringement litigation itself. As Michael Risch argues, “we should address the behavior, not the owner.” Put aside the epic, multi-billion-dollar battles in the smartphone patent wars and think about patent infringement lawsuits against small and mid-sized businesses, those companies wholly ignored by the House Subcommittee’s hearing. As Chief Judge Randall Rader of the United States Court of Appeals for the Federal Circuit — the end of the appellate road for the vast majority of patent infringement cases — summarized recently:

Let me tell you my definition of a patent troll — A patent troll is anybody who asserts a patent far beyond the value of its contribution to the art. That means that any institution can be a troll. We all understand that there are entities that are created solely for the purpose of litigating patents, which is not intrinsically bad. Again, if they are properly valuing and properly using the system to vindicate the incentives in investment and opportunities on behalf of the Patent Act there is no problem in that.

The problem comes when they will sue on a minor, minor patent… and then keep the infringement contentions very vague. Then approach and say “wink, wink, you know this is going to cost you $2 to $3 million in discovery expense alone. I’ll be happy to save you money by settling at far less than that.” And, of course, that it litigation blackmail. That’s the tactical use of the expense of the system, which is abusive. And I’m happy to say that the Federal Circuit and its Advisory Council is targeting for some kind of correction.

The whole discussion over at IPWatchdog is worth reading, not least because it’s reassuring to see that the Chief Judge at the most important patent court has recognized the problems, and has particularly recognized the ability of trolling plaintiffs to keep stringing cases along, like a troll in a comment thread, by keeping their claims sufficiently vague that the defendant has to spend hundreds of thousands of dollars preparing defenses against all of the claims that might eventually be made. Let me sum up the problem in one sentence: with a miniscule amount of work, a plaintiff with a dubious patent infringement lawsuit can force the defendant to expend over $500,000 in defense fees. An injury plaintiff and their lawyer in routine car accident case have to do more work to obtain a $25,000 settlement than an inventor and their lawyer in a patent infringement case have to do to obtain a $250,000 settlement.

Sound crazy? Think of all the work that has to be done by the plaintiff or their lawyer in a typical whiplash case. The plaintiff has to file a bunch of paperwork with their insurer, find a competent physician and then repeatedly follow-up with them, then start the same process over again with the other driver’s insurance company. When all the first-party coverage, police reports, wage loss statements, medical records, and so forth are done, it’s a fair amount of work just to put a pre-litigation settlement package together, and then even more paperwork and depositions if they file a lawsuit.

Now think of what needs to be done in a patent infringement lawsuit. Thanks to McZeal v. Sprint Nextel Corp., 501 F.3d 1354 (Fed. Cir. 2007), the initial complaint need not say anything of substance — it need merely identify the patent and the defendants. I can automatically generate one with my case management software. A couple weeks after that, the plaintiff has to put together an infringement chart that doesn’t say much beyond “your product X infringes claim Y of my patent.” A couple weeks after that, the plaintiff produces documents relating to their initial development of the device (and, frequently, the plaintiff makes a half-hearted effort at even finding the documents). Then they sit back and do nothing.

Meanwhile, the defendants are desperately scouring everything listed in the patent file history — which can include references to hundreds of other patents, which themselves reference hundreds of other patents — and everything from old devices to old trade show brochures to show the existence of “prior art” that could invalidate the patent. They’re also either working internally, or working with experts, to come up with technical arguments for why no part of their own products infringe upon the patent, even before they really know the details of the plaintiff’s infringement allegations.

That’s where the bulk of the money goes in defending patent infringement suits: to defense lawyers investigating and reviewing thousands of pages of technical documents. Do some law firms abuse that position and use it as an opportunity to overbill? Sure. But it can’t be denied that, even in a best-case scenario, it will cost $75,000 or more just to get through the initial round of defense attorney work.

Now, this system makes sense in the abstract: the inventor has already proven to the patent office the novelty and utility of their invention, so they should be able to rely on those prior efforts in the litigation. The problem, however, is that the patent office has regrettably begun giving out patents like candy, including patents for rounded corners and that cute rubber-band effect when you scroll to the end of a list on a smartphone. Part of this problem relates to the nature of the patent office — all applications are review ex parte, with no input from others in the industry — and part of it relates to more complicated issues specific to our time and political climate.

The end result is, as described in part by this interesting article on the rise of contingency fee patent lawyers, a significant “bottom” of the patent market, in which plaintiffs bring claims on dubious or weak patents and make the defendant an offer they can’t refuse: settle it by paying roughly the cost of defending it, a cost they would have to bear anyway. Note that the plaintiffs in cases involving legitimately useful and novel patents that are infringed don’t need to rely on this trolling behavior to succeed, they can affirmatively state early on the precise nature of their allegations.

It’s good to hear Judge Rader understands these problems, but at the same time he has made clear he believes “There is nothing wrong with the patent system.” If we’re going to reform the patent system, we need move beyond an obsession with “non-practicing entities” or “patent assertion entities” — i.e., the companies that exist only to make infringement claims, rather than to actually use the patents — and start discussing patent litigation itself. It may be true that “patent assertion entities” initiate more than half of all patent infringement lawsuits, but that’s a symptom, not a cause, of the system’s problems.

[Update, March 21, 2013: Eric Turkewitz chimes in with his 10 Signs The New Matter is a Dog (Before you even consider the merits). I am more tolerant of #1, #3, and #4, depending on circumstances, but #2 and #5-#10 all pretty much guarantee I will not investigate further and will reject the case. One other big point that #2, #8, and #9 can reveal: do not take on hostile clients. It doesn't matter how good their case looks, they are not worth it. If a potential client is rude to my secretary or paralegals, they are gone, no questions asked.]

Last week The Legal Intelligencer reported on the Pennsylvania Superior Court affirming dismissal of a Paxil birth defect case. (Opinion here.) The case involved a little girl born with a congenital heart defect known as hypoplastic left heart syndrome, who thereafter had a tragic course. There’s evidence tying SSRI antidepressants like Paxil to heart defects, so it’s unsurprisingly that a claim was filed, but the claim was, to put it mildly, challenging to prove. The plaintiff had no medical records from anywhere showing that she took Paxil, and no doctors who could remember prescribing her Paxil. As the trial court recounted:

Mary testified she first received Paxil from her family doctor, George Huntress, beginning September 1996. She claims Dr. Huntress gave her additional samples again in October and November 1996. Although she conceived approximately November 7, 1996, Mary testified she took Paxil until November 13, 1996 when her obstetrician confirmed [that she was pregnant]. Dr. Huntress no longer practices medicine, nor recalls treating Mary (he did not even recognize her photograph). Moreover, there are no available medical records showing he treated her at all let alone prescribing Paxil.

However, other contemporaneous medical records, including emergency room visits, indicate she took various other medications such as Ibuprofen, Bactrim, Motrin, Terazol and Flagyl. There is also evidence Mary’s obstetrician, Dr. Rick Visci, prescribed Zoloft which she took from approximately November 1995 until March 1996 and again after her pregnancy. He never prescribed Paxil.

The Philadelphia trial court dismissed the case, holding that, without medical records, the plaintiff would not be able to prove they took Paxil. (So much for the American Tort Reform Association’s claim Judge Moss is biased towards plaintiffs.) The Superior Court reversed that basis, holding that the plaintiff’s testimony created a factual issue for the jury, but then affirmed dismissal on another basis, a basis on which the plaintiff had waived its argument.

I don’t want to get into the nitty-gritty of the case, except to point out an important practice tip for plaintiff’s lawyers: don’t take cases where you don’t have any medical records to back up the plaintiff’s claims. I’ve never seen a medical record that was 100% in line with the recollections of the patient, their doctors, and their nurses, and we’ve had many cases in which we proved that medical records had inaccuracies or outright falsifications. That said, the absence of any evidence in the medical records that a plaintiff took a particular drug (if a drug case), or reported a particular symptom (if a malpractice case), or was diagnosed with the signs and symptoms of a particular injury (if an accident case) should be a big red flag for any plaintiff’s lawyer investigating the case.

The Paxil case was, in many ways, an exception that proves the rule. The case involved terrible damages (the little girl suffered a stroke at eight months old immediately following heart surgery, then passed away near their 10th birthday) and the presence of a pre-existing mass tort that made the case comparatively easier and less expensive to pursue in the pre-trial stages. So, if you have a case with huge damages, and you’re filing it alongside dozens or hundreds of similar cases, and you have a plan for proving the issue — e.g.., the plaintiff and their spouse will both testify credibly in support of the issue, like in the Paxil case — then consider it. Otherwise, kindly explain to them that the plaintiff bears the burden of proof, and recommend they get a second opinion from another lawyer before the statute of limitations runs.

So there’s our first rule: (1) don’t take cases where you don’t have any medical records to back up the plaintiff’s claims.

How about a couple more? 

(2) Don’t take cases where the potential client says the case will be a “slam dunk.” When a potential client uses phrases like “slam dunk” or “can’t lose” or “the defendant will want to settle quickly,” that’s a big red flag indicating that the potential client doesn’t understand the risks and realities of litigation, doesn’t understand that what they consider “proof” is really just “evidence,” and will blame you for the length of the litigation and the size of the settlement offer. When you hear phrases like that, your response should be either: (a) ‘my fee for this case will be $X per hour’ or (b) ‘I’m sorry. I can’t help you with that.’

Bonus tip: do not try to disabuse them of their notion that they have a “slam dunk” case. The more you try, the more you’ll get sucked into a manipulative conversation.

(3) If other lawyers aren’t taking a certain claim, then you shouldn’t either. As I wrote before, when it comes to plaintiff’s work, if something was easy, everyone would be doing it. Warren Buffett can “be brave where others are fearful”; how many billions do you have lying around in case you’re wrong? If you’re not in a position where you can bounce every case off of an experienced practitioner in that field — and even new attorneys at well-established firms can run into that issue if a case raises novel issues — then you need to set out on your own to understand where the pitfalls are in these claims.

(4) Before taking a case, see if you can avoid reinventing the wheel. Surely you’re a member of one of the many practice area-specific plaintiff’s listservs, right? They’re invaluable resources, and you can learn best practices from them. On a more basic level, to effectively pursue cases, you need to understand the gestalt of the type of case — e.g., that car accident cases are usually more about proving damages than proving liability, or that malpractice cases usually hinge more on the quality of your expert than the quality of your lawyering — and focus your efforts there. You can spend a hundred hours fumbling around on a slip-and-fall to move the insurer just as far as an experienced lawyer could with a dozen hours of work.

(5) Understand your own business model and your own portfolio of cases. There are all kinds of business plans that look reasonable for plaintiff’s firms (and for business in general) but which really aren’t. Last year, I wrote about the hidden perils of solo practitioners mixing contingent fee work with flat fee work. It’s one thing to take another slip and fall at a local grocery store when you regularly handle dozens of them; it’s quite another to take on a complicated business dispute that will swallow a large portion of your time, money, and energy for the next few years.

All in all, the more you can make your practice into a rational process and less into a series of ad hoc decisions, they better off you’ll be.

[Update, March 14, 2013: A little more than a week after my post went up, the President of the American Congress of Obstetricians and Gynecologists (ACOG) issued a statement noting "the outcome of any surgery is directly associated with the surgeon’s skill," and urging patients "to separate the marketing hype from the reality when considering the best surgical approach for hysterectomies."]

In Kurt Vonnegut’s novel Player Piano, machines have replaced humans in most jobs, but only humans can be barbers and surgeons, given the complexity of the movements required. As Vonnegut noted, barbers “[u]sed to be sort of doctors, bleeding people and setting their bones and all, and then the doctors got sore and took over all that stuff and left the barbers haircutting and shaving. Very interesting history.” Interesting indeed: for more on the history connection between barbers and surgeons, see “From Haircuts to Hangnails – The Barber-Surgeon.”

I had Player Piano on my mind as a result of two articles published last week relating to robotically assisted hysterectomies. The efficacy and safety of robotic assisted surgeries, particularly hysterectomies, is an issue of growing importance. The Da Vinci Surgical robotic surgery system is advertised as having “the potential for significantly less pain, a shorter hospital stay, faster return to normal daily activities,” but it is become increasingly clear that the system has no additional benefits beyond typical laparoscopic surgery, while imposing additional costs and risks.

First, the Journal of the American Medical Association published “Robotically Assisted vs Laparoscopic Hysterectomy Among Women With Benign Gynecologic Disease,” a study that found “Between 2007 and 2010, the use of robotically assisted hysterectomy for benign gynecologic disorders increased substantially. Robotically assisted and laparoscopic hysterectomy had similar morbidity profiles, but the use of robotic technology resulted in substantially more costs.” For a while now, surgeons have questioned the value of these machines (one example here, another here), given the absence of any proof that they’re better while costing more than double the price of a typical laparoscopic hysterectomy, and this study confirms the absence of any additional benefit. As the accompanying JAMA editorial argued, “Consumer advertising of expensive devices should be subjected to the same scrutiny as that of new and expensive medications.”

Second, Bloomberg News reported that the Food and Drug Administration was surveying surgeons to see if the $1.5 million “Da Vinci” surgical robot manufactured by Intuitive Surgical, Inc., was safe. Bloomberg framed the issue as, “[t]he answers may sway debate on whether robotic surgeries promoted as being less invasive are worth the extra cost,” which is partly true, but we need to clarify what we’re talking about: robotically-assisted hysterectomies. There are plenty of other fascinating robotic surgeries that are being studied and practiced, but each different type of surgery should be analyzed separately.

I can tell you the answer quite frankly: no, robotic hysterectomies are not worth the extra cost, and they are likely more risky than laparoscopic surgeries done without them. 

Robotic surgery sounds futuristic, like a doctor pushing the button and the robot doing all the work (as Player Piano envisioned almost all jobs), but, in reality, most robotically-assisted surgeries — including the Da Vinci hysterectomies — don’t work that way. The doctor is still making every movement themselves, but they’re doing it by controlling the robot, rather than directly making contact with the surgical instrument. It’s analogous to the difference between using the power steering in your car versus grabbing the handlebar on a bicycle: you’re in control either way, but in the former situation you’re controlling a computer which is then making the movement. Thus, the supposed primary benefit is quite simple: while laparoscopic surgery makes it harder for the surgeon to maneuver and see during the operation, robots can be more dexterous than humans, and so, a properly designed and operated robot can perform surgeries with smaller incisions and more gentle handling of tissues.

It sounds like a win-win, but the truth is a lot more complicated. Let’s start with an obvious but important point: a machine is only as good as its operator. The JAMA study noted only a slight increase in intraoperative complications, like bladder and vascular injuries, but (a) it relied entirely on the Perspective Database, which is good but not comprehensive and (b) it didn’t attempt to tease out the differences among physicians performing the procedures — which can be quite substantial. For example, a urologist who did a fellowship in female pelvic medicine and reconstructive surgery has several years more surgical training than a typical gynecologist.

It’s no secret that gynecologists don’t receive adequate surgical training:

The quality of surgical training in obstetrics and gynecology residency programs has suffered in the past 2 decades. Indeed, 63% of experienced gynecologic oncologists on the faculty of North American residency training programs reported a decrease in the surgical skills of residents compared to those trained 5 years ago. Similarly, in a European study, only 30% of residents and 78% of obstetrician and gynecological surgeons were satisfied with their training.

Shockingly, gynecology is the only surgical specialty which doesn’t require at least a year of general surgery. Take a look at some of the requirements for other surgical specialties:

• Colon and Rectal Surgery: General surgery training plus one additional year completing a colon and rectal surgery residency
• Oral and Maxillofacial Surgery: A four-year graduate degree in dentistry plus a minimum of four years in a general surgery training program
• Pediatric Surgery: General surgery training plus two years of full time education in an approved pediatric surgery fellowship program
• Urology: Two years of general surgery training plus a minimum of three years, but usually four years, in urology

Notice that most surgical specialties requiring all of the same training as general surgery. Then there’s the training required of gynecologists:

• Obstetrics and Gynecology: Four years: Three years entirely in obstetrics and gynecology, plus one elective year

In general, gynecologists don’t spend that whole year training in general surgery, they spend a mere four weeks learning and training in the principles of surgery. That’s like spending four weeks at a painting camp and expecting you can paint your own version of the Mona Lisa. Surgery isn’t a compilation of techniques; it’s an art, one that takes years to master.

We see the terrible consequences of inadequately trained gynecologists all the time in our transvaginal mesh cases. The gynecologist goes to a seminar about some sort of bladder sling kit, watches a procedure or two, then comes out thinking they can start operating on women with complicated medical conditions — yet they don’t understand the technique, don’t know how to deal with problems that arise, and don’t even know how to diagnose surgical complications.

Put simply, gynecologists are lured by medical device companies into thinking they, too, can perform real surgery despite lacking the years of training surgeons have. A typical Da Vinci robotically-assisted hysterectomy thus begins with a physician — a gynecologist with, at best, a couple weeks on a surgery rotation — who isn’t trained in the principles of surgery. That’s likely why, as Citron Research discovered, a review of the FDA’s MAUDE database shows “The most common reasons for patient injuries [arising from the Da Vinci] are perforations (organ punctures), lacerations (cuts) and tears.” The gynecologists don’t know what they’re doing, and adding a deceptively reassuring machine to the process makes it worse. It’s like we took a step back a century or two, when hysterectomy patients often died of haemorrhage and peritonitis.

Then there are two problems with the machine itself. When using the Da Vinci, the surgeon is forced to use a monopolar cautery, a/k/a a “Bovie.” The “Bovie” is an electric scalpel that uses a high-frequency electric current to cut tissue by heating it. There’s nothing inherently wrong with it — it’s one of the great surgical innovations — but it poses a number of risks, most notably the propensity to burn tissue and create “surgical smoke.” Thus, it’s also no surprise that Citron found “the second-most prominent pattern [of injury during a Da Vinci surgery] is electrocautery: burns from electrical discharge.” Given gynecologists lack of experience and training, they’d likely do better with a safer device, like a Harmonic scalpel. Perhaps more worrying, there have been reports of patients being injured when the insulation on the Da Vinci failed, and the electrical current spread from the Bovie scalpel itself and injured the patient.

Now, this is a legal blog, not a medical blog, so you can surely see where this post is headed, and, indeed, as of March 2013 more than a dozen lawsuits have been filed against Intuitive Surgical, most of them involving injuries during hysterectomies, many of them burns arising from the monopolar cautery. Even more worrying, the FDA’s MAUDE database of self-reported adverse events includes literally thousands of complaints of injuries, and 55 reported deaths. Consider this adverse event report involving a surgery last October:

It was reported 2 days post a successful da vinci si myomectomy procedure, the patient expired. … [T]he surgeon who performed the surgical procedure reported to [a consumer representative] that a tenaculum forceps instrument being used during the surgical procedure was not moving as it should. … [T]he intuitive surgical csr was notified by the surgeon that the patient was re-admitted to the hospital … due to a perforated bowel and the patient expired… .

As we know from other medical device litigations, the MAUDE reports are often just the tip of the iceberg. Thus, we might be seeing the growth of a brand new healthcare danger for women — one that wastes millions in healthcare dollars while doing nothing but putting women at risk.

Last week, a Financial Industry Regulatory Authority hearing panel gave Charles Schwab permission to modify its customer agreements to prohibit consumers from bringing class action lawsuits against the company. That’s not surprising; a narrow majority of the Supreme Court believes the enforcement of arbitration clauses deserve preferential treatment over all other legal principles, and companies have been falling over themselves to stick these sorts of waivers into every document they ever send their customers.

The surprising part is the degree to which the company feels comfortable making absurd statements like this:

“The company believes customers are better served through the existing FINRA arbitration process and that class-action lawsuits are a cumbersome and less effective means of resolving disputes – for both parties. …”

Schwab amended its customer agreements to include the class action waiver because class action litigation is unduly expensive and time-consuming, and too often results in resolutions benefiting the class action lawyers rather than their clients. … [I]t is highly questionable as to whether consumers receive any material benefit from many class action settlements. In the litigation leading to the AT&T Mobility v. Concepcion decision, the lower court commented that members of class actions “rarely receive more than pennies on the dollar for their claims, and that few class members (approximately 1 percent to 3 percent) even bother to file a claim when the amount they would receive is small.” * When Congress modified the laws concerning class actions, it commented that “Class members often receive little or no benefit from class actions, and are sometimes harmed . . .” **

Not coincidentally, Charles Schwab first stuck the class action waiver into its contracts in September 2011 — just five months after a federal court approved a $235 million settlement in a class action brought by investors against the company. Of that $235 million, more than 90% went to investors, and less than 10% was allocated as attorney’s fees.

The details of that case show exactly why Charles Schwab wants the class action waiver, so bear with me as we review In re Charles Schwab Corporation Securities Litigation, No. C 08-01510 WHA (N.D.Ca.).   For years, the company had the “YieldPlus Fund,” an “ultra-short” mutual fund that was advertised as a safe-but-more-profitable alternative to typical mutual funds, that would invest in a mixture of safe fixed-income securities over very short time frames. Like most of Wall Street, though, the company got caught up in the roaring mortgage-backed securities market of the early 2000s, didn’t bother to follow any of its own agreements or requirements, and dumped nearly half of the fund into securities backed by dubious mortgages. 

The YieldPlus Fund tanked, and a securities class action was filed on behalf of 252,729 investors. After a couple years, the case settled for $235 million (order approving settlement here), broken down as $200 million for federal law claims and $35 million for California law claims. (Notice how there’s no other state other than California listed? That’s because no other state has meaningful consumer protection laws. But I digress.) To achieve that settlement, the plaintiff’s lawyers invested $7,083,599 worth of attorney time and spent $2,710,112 out of pocket on litigation expenses, like electronic discovery and experts’ fees.

To sum up: Charles Schwab mismanaged one of its funds, making decisions contrary to their investment prospectus and in violation of fund management law, and it took nearly $10 million in attorney’s fees and expenses to get the the point that they were willing to offer a reasonable settlement. Proving securities violations by a major investment firm or national bank is difficult, time-consuming and expensive.

The details of the settlement matter. Recall that there were 252,729 class members. As the Court noted, “the average estimated settlement payment is expected to be approximately $881, and the highest estimated settlement payment is expected to exceed $2,177,000.”

Thus, in the absence of a class action, none of the cases would have justified the cost of litigating them, even if you knew in advance that you would win. Indeed, the only way the case would make any sense is if the lawyers could somehow find hundreds or thousands of the customers with the most losses — even though that information is all confidential, and all held by the company — and then somehow convince them to all sign up with you individually to bring the lawsuit at once, and to group the arbitrations together. (Charles Schwab tried to prevent consolidation of arbitrations, too, but the panel ruled against them on that.)

Indeed, if it wasn’t for the availability of the class action, many of those claims couldn’t have been brought at all. Even simple, plain-vanilla securities arbitrations in front of FINRA aren’t cheap — as one securities lawyer noted in Forbes, even if an investor wins, “[t]he average forum fees for investors—the filing fee plus 50% of the hearing session fees—are thus $4,000 to $5,000.” And that’s just for the arbitration fees, not including attorney’s fees, or litigation expenses like expert fees and discovery costs and court reporters.

Remember how the average estimated settlement payment in the YieldPlus litigation was $881? That means that the vast majority of claims — anything not worth the $4,000–$5,000 filing fees, plus attorney time, plus other expenses like experts — are worthless, even if grouped together with larger claims, because they won’t recover enough to pay even the cost of bringing them. Add to those costs the risk of bringing the claims and losing, and you start to see that all but the very largest claims aren’t worth pursuing at all.

So when Charles Schwab says “customers are better served through the existing FINRA arbitration process,” what they actually mean is that most customers can be safely cheated tens of thousands of dollars and ignored if forced into FINRA arbitration. After all, if this was such a boon for customers, why wouldn’t Charles Schwab just make it an option?

Last week, we took a ride on the corporate defense lawyer baloney train, this week we jump on the express. Two months ago, pharmaceutical manufacturer Roche Laboratories filed a motion asking Atlantic County, New Jersey Superior Court Judge Carol E. Higbee to recuse herself from the over 7,000 Accutane cases still pending in that consolidated litigation.

The 39-page brief Roche filed in support of the motion didn’t have much substance to it, but it was met with much fanfare across the tort reform world as a bold effort to attack a judge who wasn’t sufficiently accommodating to their scorched earth litigation tactics. Roche argued, for example, that Judge Higbee shouldn’t have mentioned at a conference for defense lawyers that Roche was not settling cases because “Roche considers the fact of whether settlements have or have not occurred … to be confidential,” as if we should care that Roche “considers” a publicly-available fact anyone can see on a docket to be “confidential.”

Last week, Judge Higbee denied the motion (opinion here, good LexisNexis summary here), shedding more light on how forgiving she has been of the defense misconduct in the case. 

By way of background, the Accutane litigation revolves primarily around claims that the drug causes irritable bowel disease. This isn’t some sort of trial lawyer fantasy: in 2006, researchers at the University of Chicago found a link between Accutane use and inflammatory bowel disease. Following up on the 2006 study, a study published in the September 2010 edition of the American Journal of Gastroenterology found that Accutane users had over four times the rate of ulcerative colitis as non-users.

Faced with serious claims, Roche and its lawyers came up with a couple of, shall we say, aggressive strategies, including getting plaintiffs — many of whom have suffered horrific injuries, requiring multiple surgeries and ruining the functioning of their excretory system — under oath at depositions and asking them about anal sex and whether or not they’re good Catholics who regularly attend mass. Opinion, p. 12. (In case you’re wondering, no, there’s no connection between anal sex and IBD, and Roche never produced a medical expert arguing otherwise.) The plaintiffs’ lawyers brought this misconduct to the attention of Judge Higbee, who was “disturbed” by the questions, and disturbed that the same questions were being asked at depositions across the country. A defense lawyer even told the Judge during an ex parte break (which the plaintiffs’ lawyer permitted) that she felt the questions were inappropriate and that she was following a script.

Now, if Judge Higbee was indeed biased towards the plaintiffs, she could have used this appalling episode — which apparently revealed a deliberate, nationwide attempt to intimidate and embarrass plaintiffs — to allow extensive discovery into the communications among defense counsel (to identify the source of the instructions), and then could have entered sanctions ranging from monetary penalties to the preclusion of evidence at trial.

Instead, she counseled the defense lawyer privately, and told the rest of Roche’s lawyers to stop doing it in the future. That’s it — what more did Roche want? A free pass to harass plaintiffs about their sex lives and their religion?

Yet, having already been granted one reprieve, that same lawyer came back into the court’s spotlight for improperly redacting communications an expert witness had with a third-party about a study that was being published on the eve of one of the Accutane trials, a study Roche wanted to use in its defense. The end result was the exclusion of the study from the trial, the biggest gripe in Roche’s motion.

Frankly, the real facts at issue in the recusal didn’t represent any sort of departure from the norm in scorched earth mass torts litigation. The Accutane litigation just seems to be a particularly hostile version, given that it has gone more than eight years with, as far as I can tell, a single settlement reached solely to get rid of a bellwether trial. I wasn’t going to even write about it, but then I read the ending of Judge Higbee’s order:

The Court is also not frustrated that the litigation has not settled. When there had been two verdicts in favor of the plaintiffs and there were only a few hundred cases filed, the Court encouraged the defendant and plaintiffs to settle the cases. For whatever reasons, the opportunity got away and now there are thousands of cases. This is likely much more frustrating to the parties than to the Court. The Court continued to encourage settlement negotiations between the parties with an outside mediator until they ended over a year ago. The lack of candor by defense counsel who claimed in his certification with this motion that he has been handling settlement negotiations implied there are still ongoing negotiations. This is disturbing. At oral argument, counsel acknowledged that at least for a year and maybe closer to two years, there have been no settlement discussions. This lack of candor is another example of the Court being placed in the position of having to ask counsel what appears to be a contradictory statement about the litigation.

Needless to say, if you are going to attack the Court for being unfair and unreasonable, it behooves you to refrain from making misrepresentations in your motion for recusal. Yet, apparently the lawyers couldn’t refrain from breaching even that basic tenet of good faith advocacy. Notably, Judge Higbee again granted them a reprieve for this conduct; she could have ordered sanctions there, but instead she responded by merely questioning them at a hearing and burying a criticism against an unnamed lawyer in an unpublished opinion.

Of course, the motion for recusal was only the first step of the defense’s plan, not the last, and they will undoubtedly appeal this order, too. Maybe they’ll find a more receptive audience in the appellate court — which is the part that scares me. I’ve worried about appellate courts denying trial courts the power to govern their own affairs, as in Grider v. Keystone Health Plan Central, Inc.. If the appellate court grants the recusal, what message does that send to trial courts? That it’s okay for lawyers to engage in misconduct if their client told them to do so? That, if a party complains loudly enough and raises enough issues, regardless of the merits, the court will give them what they want?

Hardly a week goes by without an insurance company, a big corporation, or one of their lobbying groups complaining about “the cost of litigation,” usually prefacing the word “cost” with hyperbolic adjectives like “soaring” or “exploding,” with the implication that, somehow, injured plaintiffs or their lawyers are to blame. Yet, whenever we see an actual example of a party engaging in absurd tactics to make litigation more costly and difficult, it always turns out that the defendant or their insurance company is to blame.  Although trial is typically the most expensive part of any case, the vast majority of cases settle, and so discovery is typically the most expensive part of most cases. (Earlier this week I turned in the updates for the Third Edition of our Pennsylvania Civil Discovery book, so discovery is on my mind.)

The railroad company Norfolk Southern, for example, spent over $250,000 last year funding non-railroad anti-consumer lobbying groups like the U.S. Chamber of Commerce, Business Roundtable, and National Association of Manufacturers, all of which have spent ample time decrying the costs of litigation and blaming trial lawyers for it.

Pannunzio v. Norfolk Southern, reported on by The Legal Intelligencer earlier this week, involves a train hitting a delivery van that was on the tracks. The driver sued the train company, alleging the train was going too fast, that the train didn’t sound a horn as it approached the crossing, and that the tracks were improperly designed, making it hard to see oncoming trains. The plaintiff’s claim as a whole is by no means simple –— they’re going to have to spend tens of thousands of dollars, maybe more, on experts testifying about how a railroad crossing should be designed — but the basic facts of the lawsuit are obviously quite simple, such as how fast the train was going and whether it sounded a horn or not.

Wouldn’t it be nice if there was, say, a camera on the train recording all that? 

Rather than sit down with the plaintiff and start talking about reasonable settlement — which would have spared them the bulk of the defense fees —  Norfolk Southern responded by trying to dismiss the case entirely. (We call that “preliminary objections” in Pennsylvania.) At the hearing on the preliminary objections, the railroad company’s lawyer popped open a laptop and started playing surveillance footage of the accident that was shot from the train, footage which showed the accident, the speed the train was traveling, and whether a horn was sounded.

That video sounds highly relevant to the case, don’t you think? The type of thing that should, as a matter of course, be turned over to the other side? It reminds me of a half-century-old trial court opinion from here in Philadelphia, explaining the purpose of discovery as a way to avoid “trial by surprise:”

Discovery, as all of us are aware, was unknown at common law. The early English concept of civil litigation envisioned a strictly adversary proceeding, a step above the ancient trial by battle, and substituting advocates fighting with their wits for champions fighting with their bodies. The “dog eat dog” philosophy then still prevalent led naturally to trial by surprise, trial by gamesmanship, the effort to catch an opponent napping, and to win by cleverness and cunning rather than by merit. Chancery intervened to a limited degree and entertained bills for discovery. But it was not until the middle of the last century that the New York Code of Procedure paved the way to the modern expanded and much more enlightened system of pretrial disclosure.

The Federal Rules of Civil Procedure, 90 years later, set up in rules 26 to 37 a comprehensive system of depositions and discovery. Rule 34, on which our own rule 4009 is based, is broader than our rule, and gives the court a large discretion to compel the production of documents without the specific limitations of our rule 4011, though with power in the court to impose restrictions, if it deems them proper.

Baukal v. Acme Markets, 38 Pa. D. & C. 2d 86 (Philadelphia Court of Common Pleas, 1966). These days by Pa.R.C.P. 4003.1, “a party may obtain discovery regarding any matter, not privileged, which is relevant to the subject matter involved in the pending action…” (The rules everywhere else are similar.)

Thus being informed of the existence of the video (by surprise at a hearing on a motion to dismiss the case, naturally), the plaintiff’s lawyer, Mark Goodheart at Cohen, Placitella & Roth here in Philadelphia asked for a copy, as he was plainly entitled to have a copy. That’s when the games started:

[A]ccording to court documents, when Goodheart expressed interest in obtaining a copy of the video, he was told by the defense that the video could only be played using special software called “RailView,” which he would have to purchase from a company called SAIC.

Goodheart looked into that, and was told it would cost $2,500, for him, his staff, and his experts to use it for just one year. He figured that was a bit steep, and so inquired further, and it turned out that SAIC didn’t even need to be asked at all:

According to court documents, Goodheart was told by the SAIC representative that Norfolk Southern actually owned the software and could waive the fees if it so desired. … In May 2012, according to court documents, Goodheart called Norfolk Southern’s counsel to inquire about obtaining the software free of charge during the litigation. Norfolk Southern’s attorney told Goodheart he’d get back to him on the issue but never did.

He filed a motion to compel, and Allegheny County Court of Common Pleas Judge R. Stanton Wettick Jr. granted it. Yet, the story doesn’t end there:

Norfolk Southern first filed a motion for reconsideration of the order, which Wettick denied, and then appealed the issue to the state Superior Court, according to court records.

In the meantime, 30 days passed and Norfolk Southern failed to comply with Wettick’s order, according to Goodheart.

Goodheart filed a motion for sanctions against Norfolk Southern on November 14, alleging that the railroad company was attempting to discourage plaintiffs’ access to discovery materials by charging exorbitant fees to view the surveillance footage.

He even dug up a Court of Appeals decision in Georgia last year in which Norfolk Southern played the exact same trick, refusing to turn over their own software for viewing the video of the train accident in question. Goodheart asked in the sanctions that Norfolk Southern be precluded from using the footage at trial, and that the jury be instructed the company concealed evidence.

So what was Norfolk Southern’s excuse?

Norfolk Southern, meanwhile, filed a brief in opposition, arguing that requiring it to provide the footage and software for free constituted unfair cost-shifting.

Did you catch that? The default rule is that a responding party has to pay for the cost of their own production of relevant materials, but it’s no minor feat, for example, to scan thousands of pages of documents, and so the discovery rule make allowances for these issues, allowing courts to “shift” costs where appropriate. Recent revisions to the Pennsylvania Rules clarified that, when it comes to discovery of electronically-stored information, “[a]s with all other discovery, electronically stored information is governed by a proportionality standard in order that discovery obligations are consistent with the just, speedy and inexpensive determination and resolution of litigation disputes.” Pa.R.C.P. 4009 (Explanatory Comment)(emphasis added). Further, “Parties and courts may consider tools such as electronic searching, sampling, cost sharing, and non-waiver agreements to fairly allocate discovery burdens and costs.” (Emphasis added.)

According to Norfolk Southern,not paying a ransom to hand over a video they can hand over for free is like ordering it to participate cost-shifting, as if it was being ordered to pay for the plaintiff’s discovery. In reality, Norfolk Southern wasn’t being asked to do much of anything other than to simply allow the plaintiff’s lawyer to install software off a CD or USB drive. It would have taken less effort — and certainly less money — for the railroad company to simply hand over the software and video than was for them to file their first objection, much less their motion for reconsideration and appeal.

The part that trial lawyers and insurance defense lawyers all know, but which isn’t repeated enough, is that this sort of chicanery by corporate defendants and insurance companies is commonplace in litigation; the bigger the case, the more obstruction/baloney you’ll get.

Via Overlawyered and TortsProf, I saw that a new law review article came out last week in the Vanderbilt Law Review, “Products Liability and Economic Activity: An Empirical Analysis of Tort Reform’s Impact on Businesses, Employment, and Production” by Joanna Shepherd. As a products-liability lawyer (and an armchair economist), I was excited, so I printed out a copy, sat down with my highlighter, and, unfortunately, didn’t even make it past the third page without gnashing my teeth in frustration:

Specifically, we know surprisingly little about whether products liability law suppresses economic activity, and which, if any, reforms might improve economic conditions.4

This Article provides empirical evidence that addresses this argument. This issue is particularly salient because economic conditions are worse than they have been in decades, yet the cost of the products liability system continues to grow. Consequently, probusiness groups have intensified their demands for tort reform, maintaining that reforms are essential to improving the economy. Hence, it is imperative for lawmakers to know which reforms can help mend current economic conditions. Moreover, the tort system costs American businesses over $150 billion annually.5

4. AM. TORT REFORM ASS’N, supra note 2.

5. TOWERS WATSON, 2010 UPDATE ON U.S. TORT COST TRENDS 7 (2010)

There are two big empirical problems right out of the gate.

First, the Towers Watson report — Shepherd’s sole citation for the assertion that “the tort system costs American businesses over $150 billion annually” — has been repeatedly discredited for inflating its numbers and for relying on secret proprietary data, instead of the industry standard A.M. Best data. Similarly, as I’ve explained before, even if we corrected the numbers, the Towers Watson study still wouldn’t make any sense: the study absurdly refers to every benefit paid to an injured person as a “cost” to society. This would be an accurate analysis if injured persons took their settlement checks and promptly set them on fire.

In reality, as the Coase Theorem makes clear, money paid out in tort liability is not a “cost” to society, it’s just a transfer from one party to another, because the money goes right back into the economy through payments to medical providers and insurers (who subrogated part of the injured person’s claim). The money left after those medical and insurance costs goes towards remedying the insured person’s lost wages, and thus goes to the same healthy economic expenditures as before, like paying for their children’s education, or buying a new house, or putting food on the table. (Before someone claims, “but the lawyer’s fees are a transaction cost,” remember that, in personal injury litigation, the lawyer’s fees are not added to the defendant’s liability, but rather subtracted from the plaintiff’s recovery, and so they do not add to the overall recovery.)

Second, and even more worrisome in a study that purports to make “empirical” arguments, is the lack of any citation at all for Shepherd’s assertion that “the cost of the products liability system continues to grow.” Have the “costs” of our product liability system actually grown relative to the size of the economy? My hunch would be no; as Shepherd admits, since the 1980s, “state after state enacted legislation designed to curb the [fictitious liability insurance] crisis by limiting the scope of liability and damages,” and the federal government has enacted special liability protections for “general aviation aircraft,” “biomaterials suppliers of raw materials and medical-implant component parts,” and “manufacturers, distributors, dealers, and importers of firearms or ammunition.” I’d add to that list of political victories by product liability defendants the increasing adoption of the Third Restatement of Torts (which essentially eliminates strict liability) and the wholesale elimination of claims against generic drug manufacturers.

In short, product liability law has been increasingly favoring defendants for more than a generation, so why should we assume that the cost of the product liability system is growing relative to the economy? 

Indeed, the few pieces of empirical evidence we have indicate that liability in general is contracting. Insurance companies’ surpluses — the amount they have left over after paying out claims — have grown much faster than the economy over the past twenty years, jumping from $138 billion in 1990 to $580 billion in 2010. (Source here, relying on A.M. Best’s data.) That surplus indicates that insurers certainly aren’t feeling much of a growth in tort expenses, and that, if anything, they’re charging more than they need to — the insurance industry’s surplus is four times larger than even the grossly inflated “cost” of the whole tort system dreamed up by Towers Watson.

After that worrying opening, the next two-thirds of Shepherd’s article retell the history of product liability law and summarize a variety of anti-consumer reforms (for the full state-by-state list, see this document), then make a bunch of vague assertions that product liability law is no longer needed to make consumers safer. Shepherd asserts, for example, that “Market forces provide a significant incentive for many manufacturers to improve product safety,” as if there were no market forces back in 1965 when Unsafe At Any Speed was published, and as if we still didn’t see wave after wave of hopelessly unsafe products, ranging from rifles that fire with the safety on, to exploding tires, to another 60,000 mesothelioma cases expected over the next few decades.

I was about to give up on Shepherd’s article without having even made it to the empirical analysis, but I’m glad I stuck with it — there are problems with the study, but they’re problems that reinforce one of my longtime arguments on this blog: tort liability has, at most, a trivial impact on the economy.

Shepherd uses “a sophisticated triple-differences methodology” that is “still relatively new in the empirical literature.” In short, focusing on the period from 1977 to 1997, she looked at a couple general indicators of a state’s economy, like GDP, employment, and new small businesses, and then tried to tease out differences between “low-risk” industries that presumably don’t feel the effects of product liability law (e.g., “business services”) and “high-risk” industries at the forefront of product liability law, like manufacturing. Someone has to be the first to try a new method, so I don’t fault her for trying it, but the model must admit two serious limitations.

First, Shepherd’s model looks only for correlations, rather than any causal relationship. As shown by the adjacent, hilarious image, the old scientific maxim that ‘correlation does not imply causation’ should always be remembered whenever an economic study tries to “prove” that a certain change in the law caused a certain economic effect. In this case, I think her results ironically show not that tort reform in the area of product liability produces economic benefits, but that product liability law simply doesn’t affect the economy much one way or the other.

Shepherd identifies seven main types of product liability “reforms” that she examines:

1. Product-Seller Liability [absolving distributors, sellers and retailers of liability for dangerous products]
2. Noneconomic Damage Caps
3. Eliminating or Limiting Joint and Several Liability [making injured people, rather than profitable companies, eat the loss when one of the defendants goes bankrupt]
4. Comparative Negligence [most states have this — the issue is applying it to strict liability]
5. Punitive Damage Caps
6. Collateral Source Rule Abolishment
7. Statute of Repose Limitations [i.e., the latest possible date to sue after a product is sold, regardless of when the injury occurred]

I’ve ranked the above proposals in the order that, in my humble opinion, best reflects how worried plaintiff’s-side product liability lawyers are about them. “Product-Seller Liability” might as well be called “the Walmart law,” because the practical effect of that type of tort reform is that Walmart can sell you a child’s toy loaded with radium and you won’t be able to sue them for it (because they’re merely a “seller”), nor will you be able to sue the brand name listed on the package (because they’re merely a “distributor”), you’ll be stuck chasing some fly-by-night company on the other side of the world that was set up for the purpose of evading liability. Trial lawyers obviously don’t want that.

Last on my list above is the statute of repose, which, according to Shepherd, has more impact on the economy than any other form of tort reform (more on that in a moment). To trial lawyers, however, the statute of repose is usually not an issue in product liability cases. Most states don’t have one, and, in all but a few states, it’s 10 years or longer.

The statute of repose matters in product liability litigation over old airplanes and automobiles — e.g., rollover claims for the second-generation Ford Explorer are now barred in Georgia — but in the vast majority of cases, it’s irrelevant. It’s also the liability restriction least likely to produce any immediate effects in the economy, given its time-delayed nature. In contrast, capping noneconomic damages (#2 on my list, but many would say it should be #1) would have an immediate, severe effect on virtually all claims — like it did in Texas, when caps decimated malpractice filings there. (Unsurprisingly, the caps did nothing at all to make medical care cheaper or more widely available in Texas.)

Yet, despite the limited impact of the statute of repose to trial lawyers, guess which “reform” had by far the biggest impact on the economy in Shepherd’s study? She writes, “statutes of repose are associated with approximately a 20.92–25.61 percent increase in employment in manufacturing industries during the sample period.” Wow! It’s like a statute of repose can alone can counteract the effects of globalization and restore all the manufacturing jobs lost over the past decade.

Alas, all we’re seeing is a classic example of correlation does not imply causation. Consider this empirical data: from 1977 to 1997, New York’s economy grew 3.7x, California’s economy grew 4.5x, Texas’ economy grew 4.7x, and Florida’s economy grew 6x. Texas and Florida have statutes of repose, while New York and California do not. Did the statute of repose cause the faster growth in Texas and Florida, or is it coincidental? I think the answer is obvious; the supposed economic benefits of having a statute of repose are merely a mirage, a side-effect of much larger trends at work.

But I think the bigger problem of this whole exercise is the mistaken assumption that liability always amounts to a “cost” on society. Shepherd’s model, like the Towers Watson model, ignores two fundamental facts about the economics of personal injury: when a person is injured, that injury imposes a cost to society, and when a person is not injured, that reflects a savings to society. When a person is injured by a defective product, their medical care and their lost wages are a cost to society created by the defective product, not by the legal liability. Changing product liability law to introduce “reform” doesn’t make those costs go away — if anything, it increases those costs, by removing the incentive to make products safer — it just makes victims, rather than culpable parties, bear the expense of them.