On Sunday, the New York Times returned to third-party funding of lawsuits with “Investors Put Money on Lawsuits to Get Payouts:”

Large banks, hedge funds and private investors hungry for new and lucrative opportunities are bankrolling other people’s lawsuits, pumping hundreds of millions of dollars into medical malpractice claims, divorce battles and class actions against corporations — all in the hope of sharing in the potential winnings.

Total investments in lawsuits at any given time now exceed $1 billion, several industry participants estimated. Although no figures are available on the number of lawsuits supported by lenders, public records from one state, New York, show that over the last decade, more than 250 law firms borrowed on pending cases, often repeatedly.

The rise of lending to plaintiffs and their lawyers is a result of the high cost of litigation. Pursuing a civil action in federal court costs an average of $15,000, the Federal Judicial Center reported last year. Cases involving scientific evidence, like medical malpractice claims, often cost more than $100,000. Some people cannot afford to pursue claims; others are overwhelmed by corporate defendants with deeper pockets.

A review by The New York Times and the Center for Public Integrity shows that the inflow of money is giving more people a day in court and arming them with well-paid experts and elaborate evidence. It is helping to ensure that cases are decided by merit rather than resources, echoing and expanding a shift a century ago when lawyers started fronting money for clients’ lawsuits.

On the one hand, it’s hard for me to say much new about these issues, since I’ve already discussed the issue twice in “Investing in Lawsuits” – The Free Market Counterpart to Liability Insurance and Investing In Lawsuits, Part II: New Law Review Article On Third-Party Litigation Funding.

In short, there’s nothing novel or interesting about the idea of a third-party funding litigation — we already have a multitrillion dollar industry devoted to the practice, it just happens to be devoted entirely to litigation defense. We call it “liability insurance.”

Since we permit defendants to have a third-party fund their defense and indemnify their liability, it stands to reason and to fairness that we should permit plaintiffs to reach financial agreements with third-parties to fund their claims and to share the proceeds of those claims. Anything less would deny plaintiffs a fair resolution of their cases on the merits, since the lack of resources would preclude many plaintiffs from pursuing meritorious claims, just like the lack of defense insurance would force defendants with inadequate resources to settle.

It’s refreshing to see that many of the people invited to comment in the “Room for Debate” connected to the article — alas, not one of which is a practicing attorney — get the analogy between insurance and plaintiff-side funding. Here’s Prof. Susan Lorde Martin:

Defendants in lawsuits often have insurers to finance their litigation expenses; litigation finance firms merely play that same role for plaintiffs, leveling the playing field. Such financing can allow a plaintiff to remain in the legal battle long enough to have a realistic opportunity to achieve legal success. It can also serve as an alternative way for businesses to manage risk and cash flow associated with legal proceedings.

There is no public policy reason to deny businesses the opportunity to share litigation risks with interested lenders or investors in exchange for some of the proceeds. Individuals who receive such financing are represented by lawyers, and if they lose their lawsuits they keep the money advanced to them and do not have to pay anything back.

Prof. Anthony Sebok takes this analogy one step further, and sees the possibility of litigating financing spreading to the masses, opening a world of civil litigation previously denied to everyone who either isn’t rich or didn’t suffer enough in economic damages to encourage a plaintiff’s lawyer:

While I am concerned about the overall cost of litigation, I am more concerned about the imbalance of resources available to the average American. Right now, our system depends on lawyers who take on plaintiffs’ cases to carry the costs of the cases. This is one reason the contingency fee has become an indispensable part of our civil litigation system.

I have nothing against lawyers financing litigation, but I do not understand why lawyers are the only option available to plaintiffs seeking capital from an outside source. Non-lawyer funders (litigation financing firms and/or third-party investors in lawsuits) might even be able to provide this capital more cheaply and more transparently so that lawyers would charge only for their time and nothing more. Non-lawyer funders could also help finance litigation costs for defendants as well.

Indeed, one of the main reason contingent fee lawyers charge so much is because their work is so risky. Plenty of cases end with lawyers spending hundreds or thousands of hours, and tens or hundreds of thousands of dollars (sometimes millions), and ending up with nothing. Consider A Civil Action. A lot of patent infringement lawyers learn the hard way when they invest more than a million dollars in a case in just expenses, not to mention attorney time.

Even some of the tort reformers have had some sense knocked into them. Prof. Richard Epstein — who has proven himself to be wholly unfamiliar with the American legal system — admits that his key concern is an empirical one, and that he doesn’t have the data to reach a conclusion either way:

The key question is whether these new aggregations of wealth are sufficient to force defendants to settle cases on disadvantageous terms because they cannot afford to pay the legal fees needed for defense. That question is exceedingly difficult to answer because the legal system already affords some protection against burdensome document production and endless depositions of expert witnesses. It is hard to say in the abstract whether that is enough.

It’s difficult to answer that question in the abstract, but consider this: in the vast majority of cases, the costs are low enough that attorneys don’t need to use third-party financing. Major investment in a case usually only occurs in mass tort cases brought against huge corporate defendants — the article in The New York Times gives an example of a case brought by “residents of the faded Texas factory town” against BNSF Railway, “the nation’s second-largest railroad company.”

Does anyone have trouble distinguishing David from Goliath there? Does anyone really believe that BNSF Railway doesn’t have adequate funds to defend the case? If BNSF Railway ends up settling it, it will be because the company is worried about liability, not because it can’t afford the costs of defense.

But there’s always someone willing to complain about a good idea, and this time it’s Prof. Paul Rubin, an economist:

The main effect of allowing third party finance is to increase the number of lawsuits. This will happen for two reasons. First, some lawsuits are too expensive or too risky for law firms to finance themselves. A law firm paid on a contingency basis finances the lawsuit, but if a lawsuit is too expensive and too risky no law firm will be able to undertake this financing. Thus, allowing third party finance will enable these expensive lawsuits to proceed.

In other words, it’s a good thing that meritorious cases will not be brought because they are “too expensive and too risky” to take on. Let the victims eat cake.

Prof. Rubin doesn’t seem to have enough familiarity with the tort system to know what makes a case “too expensive and too risky,” but I can tell you the two biggest factors: the amount of damage caused by the potential defendant and the ability of the defendant to over-litigate the case. In general, the more widespread the damage, the harder it is to prove the damage within the rigorous standards demanded by courts, and the more will need to be spent on the investigation and the experts.

To take one example, environmental cases are notoriously expenses and risky, and companies fight them to the death — just ask Erin Brockovich, who is heading back to her hometown after “a large plume of water laced with the offending hexavalent chromium, or chromium 6, has been found spreading beyond an agreed containment boundary and towards residents’ homes.”

But let’s move on to Prof. Rubin’s other factor:

Second, allowing third-party finance will create an interest group — those with experience in financing lawsuits. As an interest group these financiers will act so as to increase the amount of lawsuits in society, and to resist efforts at reform. Since we already have excessive litigation in the U.S. anything which increases the amount of litigation like third-party finance is likely to be harmful.

I suppose there’s some truth to that — and there’s even more truth to the fact that we already have an “interest group” that acts to decrease the amount of lawsuits and liability in America, despite the merits of those cases.

It’s called the insurance industry.

Does Prof. Rubin think they should be banned, too?

Or is this a heads-defendants-win, tails-plaintiffs-lose type of argument?

It’s no secret that oil companies like Chevron play hard ball; just a few years ago, Chevron paid $30 million to settle allegations that it had bribed Saddam Hussein’s regime in Iraq to participate in the UN’s oil-for-food program.

As most readers know, down in Ecuador Chevron is defending a civil case over alleged contamination of dozens of villages in the Lago Agrio; it’s no surprise there has been "a fierce lobbying effort by Chevron in Washington to strip Ecuador of American trade preferences" because the Ecuadorian President has expressed support for the Lago Agrio villagers.

Chevron similarly launched a sting operation to try to catch the President’s sister bribing the judge presiding over the case, and declared, once the operation was finished,  “We think this information absolutely disqualifies the judge and nullifies anything that he has ever done in this case.”

One tiny problem with the sting operation, in the words of the New York Times: "The recordings do not indicate whether Ms. Correa was aware of the efforts to include her in a bribery scheme. Nor is there confirmation that Mr. García was in fact in contact with her."

In other words, Chevron found nothing on the judge and nothing on the President, but they launched a public relations offensive on it anyway.

Keep that in mind while you consider the latest news:

In a strongly worded opinion released Friday, federal district judge Lewis Kaplan in Manhattan elaborated on his reasons for allowing Chevron Corporation to depose Steven Donziger, the U.S. plaintiffs attorney in the massive environmental tort litigation against Chevron in Ecuador. Earlier this fall, Chevron had moved to depose Donziger, claiming that the trial in Ecuador had been tainted by fraud by the plaintiffs; in an October 20 order, Kaplan allowed additional discovery from Donziger.

In Friday’s opinion, Kaplan concluded that "the need is extremely great" to depose Donziger. He based his decision on outtakes from a documentary on the litigation, Crude–footage that Chevron had subpoenaed and submitted in support of its fraud allegations.

Kaplan found "substantial reason to believe that [Richard] Cabrera, the supposedly neutral expert [appointed by the Ecuadorian court in Lago Agrio], worked in collusion with the plaintiffs." Breaking it down further, he points to "substantial evidence that (1) Cabrera was appointed as a result of Lago Agrio plaintiffs’ ex parte contacts with and pressure on the Ecuadorian courts, (2) at least part of his report was written by consultants retained by the Lago Agrio plaintiffs, and (3) the report was passed off as Cabrera’s independent work."

There was more bad news for Donziger. Chevron had been joined in its discovery motion by two lawyers who worked for Chevron’s predecessor Texaco. They are currently being prosecuted by Ecuador, along with seven government attorneys, for signing off on Texaco’s cleanup of oil sites when it left the country. The criminal case against them in Ecuador, Kaplan wrote, "appears to have been instigated by Donziger and others working with him for the base purposes of coercing Chevron to settle and undermining a significant element of its defense in Ecuador."

In Kaplan’s view, these and other episodes raise "substantial questions as to [Donziger’s] possible criminal liability and amenability to professional discipline."

As I wrote before (Chevron Allowed To Depose Plaintiff’s Counsel In Ecuador Toxic Tort Litigation), I agree with Judge Kaplan’s order permitting Donziger to be deposed.

But let’s not get ahead of ourselves here. Corporate Counsel posted the outtakes identified as the worst-of-the-worst. Judge Kaplan singled out three episodes (the language below is from Kaplan’s order and the quotes are Donziger on the tapes):

  1. “The only language that I believe this judge is going to understand is one of pressure, intimidation and humiliation. And that’s what we’re doing today. We’re going to let him know what time it is. . . . As a lawyer, I never do this. You don’t have to do this in the United States. It’s dirty. . . . It’s necessary. I’m not letting them get away with this stuff.” 

  2. Donziger told those present that the Lago Agrio plaintiffs needed to “do more politically, to control the court, to pressure the court” because Ecuadorian courts “make decisions based on who they fear most, not based on what the laws should dictate.” Donziger expressed concern that no one feared the plaintiffs, and he stated that the plaintiffs would not win unless the courts begin to fear them. Donziger described also his desire to take over the court with a massive protest as a way to send a message to the court of “don’t f— with us anymore – not now, and not – not later, and never.” He then proposed raising “our own army” to which Yanza interjected “a specialized group . . . for immediate action.” 

  3. Finally, Donziger participated in a dinner conversation about what might happen to a judge who ruled against the Lago Agrio plaintiffs. One or more other participants in the conversation suggested that a judge would be “killed” for such a ruling. Donziger replied that the judge “might not be [killed], but he’ll think – he thinks he will be . . . which is just as good."

A common objection, too, has been claims that Donziger met ex parte with the judge and the independent expert, but as far as I can tell that’s permitted in the Ecuadorian system. I haven’t seen anyone argue otherwise.

Michael Goldhaber at The American Lawyer had the most reasonable analysis of the ethical implications of the case back in September:

But even if one discounts as a joke the use of the word "army," and takes as hyperbole the expression of satisfaction that the judge may fear being "killed," one is left with a straightforward account of how plaintiffs have hired protesters outside the courthouse, and plan to do so again. It’s hard to read the transcripts filed by Chevron without concluding that Donziger’s intent in doing so was to put political pressure on the court.

When we asked Chevron’s lawyers what would be their next steps, Andrea Neuman of Gibson, Dunn & Crutcher chose her words carefully. "We’re taking a careful look at Chevron’s rights, including its rights under RICO," she said, "and we’re very cognizant of the responsibility of all lawyers to refer appropriate matters to the bar disciplinary committee."

In Corporate Counsel sibling publication The American Lawyer‘s Bar Talk section in October, we’ll examine Chevron’s RICO option. For this column, we asked two scholars to help assess the legal ethics. Both spot a host of ethical issues, including Chevron’s allegations, based on the first set of transcripts, that plaintiffs undermined justice through systematic ex parte contacts with the court-appointed damages expert. (Plaintiffs have argued that ex parte contacts are culturally accepted in Ecuador, and that they broke no rules.)

"It’s clear Donziger is crass, profane, and irreverent," said Nora Freeman Engstrom, a Stanford Law School expert on plaintiffs’ lawyer ethics. "Far less clear is whether he’s engaging in serious professional or criminal wrongdoing, although it’s possible." She added: "Our system does not require as precondition of advocacy absolute trust in one’s tribunal."

Catherine Rogers of The Dickinson School of Law at Penn State University, who studies global legal ethics, was more troubled by the transcripts. "If it turns out to be true they paid people to intimidate the court and make the judge fear for his life in a way that was designed to affect his judicial ruling, that’s nowhere close to the line of what is ethical," she said. "That’s thuggery, an interference with the administration of justice, and a gross violation of the ethical rules of every jurisdiction I am familiar with."

In her writings and lectures, Rogers has argued that U.S. ethical rules should generally be understood as applying to U.S. lawyers’ conduct in foreign tribunals and justice systems, and that the New York Lawyer’s Code of Professional Responsibility clearly does apply. Among the relevant rules in New York: Rule 3.5(a)(1) says that a lawyer shall not seek "to influence a judge, official or employee of a tribunal by means prohibited by law." New York Rule 8.4 says it’s misconduct to "engage in conduct that is prejudicial to the administration of justice." And Rule 3.3(f)(4) says a lawyer shall not "engage in conduct intended to disrupt the tribunal."

To be sure, those tapes of Donziger aren’t going to be played at CLEs any time soon as an example of model behavior. But do they show Donziger crossing the line from Engstrom’s view — i.e., being contemptuous of the tribunal isn’t necessarily criminal or unethical — over to Rogers’ view — i.e., threatening the presiding judge impairs the fairness of the court?

Donziger’s obviously a pugnacious lawyer prone to hyperbole, and there’s no doubt that he’s been more politically active than legally active in the case.

So what? Chevron launched a "fierce lobbying effort" to punish the whole country for the case and has never hesitated to impugn the integrity of the court in the press. There’s nothing unethical about any of that. Same goes with routinely complaining in private about the moral and ethical failings of the judge — something I’m sure Chevron’s lawyers do on a routine basis, since they’ve already done the same in public.

Donziger’s stray remark about "shutting down" the Court with a protest would certainly be a problem if he actually did it, but I haven’t seen any evidence of that, either — whereas we know for a fact that GOP operatives staged the "Brooks Brothers Riot" to interfere with the 2000 election recount, and we know all about Chevron’s bribes in Iraq, which resulted in nothing more than disgorging the wrongful profits and a modest fine. Assuming Donziger took the milder approach, hiring people to fake a genuine protest outside the courthouse sure is crass, but is it any worse than the "lawsuit abuse" propaganda campaigns funded by the U.S. Chamber of Commerce?

More to the point, is it actually illegal or unethical? I’ve never seen any Court in the U.S. find lawful political activism — like the staging of protests — to be illegal; likely since such a finding would almost certainly violate the First Amendment. It’s thus hard to see how paid-for political activism (so-called "astroturf"), crass as it might be, is unethical, and if it is, it’s hard to see how Chevron and the companies that make up the U.S. Chamber of Commerce aren’t just as guilty.

Or do we have one set of rules for those who advocate on behalf of the powerless and another for big corporations?

At The American Lawyer:

A federal judge in Manhattan has taken the extraordinary step of granting Chevron’s motion to depose a counsel for its adversaries in the massive toxic tort litigation over oil contamination in Lago Agrio, Ecuador.

Kaplan based his ruling on evidence Chevron produced from outtakes of the documentary "Crude," which chronicles the Lago Agrio case. He called the outtakes "extraordinarily revealing."

"The outtakes contain substantial evidence that Donziger and others were involved in ex parte contacts with the court to obtain appointment of the expert; met secretly with the supposedly neutral and impartial expert prior to his appointment and outlined a detailed work plan for the plaintiffs’ own consultants; and wrote some or all of the expert’s final report that was submitted to the Lago Agrio court and the Prosecutor General’s Office, supposedly as the neutral and independent product of the expert," Kaplan wrote.

Moreover, the judge concluded, the outtakes contained evidence that Donziger lobbied for criminal charges against the former Chevron lawyers in order to pressure Chevron in the Lago Agrio case.

Lawyers are trained from the day they arrive at law school to consider attorney-client privilege to be sacrosanct, and my initial reaction to this news was indeed surprise and outrage that a court would set that principle aside to benefit an oil company that spent years contaminating the drinking water of politically powerless people.

But the bigger picture needs to be considered. I’ve written before, back in discussing Mohawk Industries v. Carpenter (which considered whether attorney-client privilege issues are entitled to an interlocutory appeal) that attorney-client privilege is often overrated:

In one sense, the question we’re really asking is one of balance. Everyone would like to have every issue decided against them made immediately appealable. But we can’t do that; as the former judges’ brief notes, the courts are overworked as is, and, as the plaintiff’s brief notes, there are dozens of serious issues — like those affecting constitutional rights and criminal convictions — which are not immediately appealable.

Where does attorney-client privilege (involving discussions regarding a separate case) fit on the totem pole?

A little more than a year later, the Supreme Court decided that attorney-client privilege is important, but not that important: 

The crucial question, however, is not whether an interest is important in the abstract; it is whether deferring review until final judgment so imperils the interest as to justify the cost of allowing immediate appeal of the entire class of relevant orders. We routinely require litigants to wait until after final judgment to vindicate valuable rights, including rights central to our adversarial system. See, e.g., Richardson-Merrell, 472 U. S., at 426 (holding an order disqualifying counsel in a civil case did not qualify for immediate appeal under the collateral order doctrine); Flanagan v. United States, 465 U. S. 259, 260 (1984) (reaching the same result in a criminal case, notwithstanding the Sixth Amendment rights at stake). In Digital Equipment, we rejected an assertion that collateral order review was necessary to promote “the public policy favoring voluntary resolution of disputes.” 511 U. S., at 881. “It defies common sense,” we explained, “to maintain that parties’ readiness to settle will be significantly dampened (or the corresponding public interest impaired) by a rule that a district court’s decision to let allegedly barred litigation go forward may be challenged as a matter of favor.” Ibid.

We reach a similar conclusion here. In our estimation, postjudgment appeals generally suffice to protect the rights of litigants and assure the vitality of the attorney-client privilege. Appellate courts can remedy the improper disclosure of privileged material in the same way they remedy a host of other erroneous evidentiary rulings: by vacating an adverse judgment and remanding for a new trial in which the protected material and its fruits are excluded from evidence.

(Emphasis added.) A similar dynamic is at play in the Lago Agrio case. The plaintiff’s lawyer’s attorney-client privilege must be weighed against the fact that two former Chevron lawyers are facing criminal charges in Ecuador, and the fact that the evidence in possession of the plaintiff’s lawyer is apparently unavailable elsewhere.

Moreover, the order is apparently limited to the pertinent issues, and doesn’t permit a fishing expedition into the attorney’s impressions of the case or contacts with his clients:

If Southern District of New York Judge Lewis A. Kaplan’s ruling Wednesday in In re Application of Chevron Corp., 10 MC 00002, stands, Chevron’s counsel from Gibson, Dunn & Crutcher and counsel for two former Chevron lawyers facing criminal charges in Ecuador will be able to ask lead plaintiffs attorney Steven Donziger questions, under oath, about his alleged attempts to influence a supposedly neutral expert appointed by the Ecuadorean court to offer a global damages assessment. The judge also has ordered Donziger to produce documents related to his interactions with the expert.

My only hope is that this isn’t a one-shot, defendants-win, plaintiffs-lose deal. If these rules will be applied equally — and thereby permitting plaintiff’s lawyers to depose defendant’s lawyers when the circumstances warrant — then we’ll all benefit.

Indeed, plaintiffs would likely benefit from a relaxed view of attorney-client privilege; after all, multinational corporations usually have a lot more to hide than injured plaintiffs do.

Kenneth Feinberg, whose pro bono publico work in the 9/11 Compensation Fund was widely lauded, is back again administering the $20 billion BP Compensation Fund and is in the middle of a publicity tour on the Gulf of Mexico. C-SPAN just posted a video of him discussing the Fund and his work on it this morning.

Unlike with the 9/11 Fund, though, this time Feinberg is getting paid, and that raises a few questions.

Nobody questions Feinberg’s integrity, but the whole point of having a nation of law, not men, is to make everyone accountable to that law, and Professor Byron Stier at the Mass Tort Litigation Blog raises the right issues:

The issue of Feinberg’s compensation is interesting. Feinberg worked pro bono on the 9/11 victim compensation fund — a remarkable and laudable commitment given the substantial time involved. I’m not suggesting that Feinberg should go on doing such monumental administrative tasks pro bono — but is it appropriate for him to keep his compensation from BP confidential?

As with the 9/11 fund, Feinberg will likely have tremendous discretion in fashioning the administrative claim mechanism for the BP compensation fund. His exercise of discretion could possibly result in BP saving substantial funds, especially if any remainder of the $20 billion fund is to be returned to BP. Accordingly, a fair process at a minimum requires that both the amount of his compensation, and the method of compensation be disclosed publicly. If BP has the ability to review and cut his billable hours or his billable-hour rate, for example, Feinberg might have a conflict of interest that could lead him unconsciously to favor BP in structuring the administrative fund or making awards.

Andrew Perlman at Legal Ethics Forum follows up:

I haven’t followed the details of the BP fund, but if there is little or no chance that there will be money in the fund after the awards are made (a seemingly plausible assumption), I’m not sure I see how Mr. Feinberg’s behavior could be impacted (consciously or unconsciously) by his compensation.  BP is out the $20 billion regardless of how the proceeds are distributed.  Are there other ways in which Mr. Feinberg’s conduct might be affected by how his compensation is structured?

I’m not Feinberg’s accountant, but from the little bit I know about his practice — like his role in resolving the multibillion-dollar antitrust suit by AmEx against MBNA — I’m confident that Feinberg is doing quite well financially, and isn’t planning on making this Fund into his own retirement. Similarly, in light of his unpaid commitment to the 9/11 Fund, I imagine he values his reputation, not to mention his dignity and integrity, over any quibbling over billable hours that he might get from BP.

On paper, there’s no obvious reason for concern. But Roger Ebert’s rules for critics comes to mind:

No commercial endorsements. This used to be a given in journalism ethics. A critic must be especially vigilant. If you express approval of a product, you must sincerely believe what you are saying. How will we know you’re sincere? Because you have (1) accepted no money, (2) or donated the money to a charity, and (3) have not accepted a free example of the product, except in such cases as foodstuffs, where the difficulties are apparent. You gotta eat ’em to review ’em. The Sun-Times has a policy: All Christmas gifts must be returned, except for perishables like papayas, etc. Candy is not a perishable. Neither, to the incredulity of many reporters, is liquor. Back to endorsements. Were I to recommend, say, a rice cooker, that must not imply I obtained it for free, or that 100 lb. sacks of rice were being dropped at my door. I mention this because I may be compelled to recommend a rice cooker in the very near future, in defense of my Who’s Who entry, which claims I can cook almost anything in a rice cooker.

No advertisements. Gene Siskel, who I frequently quote as a fierce paragon of high standards, used to quote what someone, maybe it was David Mamet, told him: "As a critic, everything you say depends on your credibility. When you sell that, somebody else owns it." Gene and I (regretfully) turned down offers in the extremely low seven figures  from a fast food chain and an airline. "After we retire, then it would be okay," we speculated. Even then, maybe not. Look at Fred Astaire. How many people thought they were paying him for their dance lessons? They look at "Swing Time" on TCM, and say, "There’s that bastard who overcharged me for the mambo."

The emphasis of Mamet’s quote is mine. Fact is, Feinberg is being paid by BP to run the Fund, and being paid by BP to promote the Fund. That’s enough to create the appearance of impropriety.

Among judges, it is unnecessary to demonstrate the reality of impartiality; the paramount concern is the appearance of impropriety:

The goal of section 455(a) is to avoid even the appearance of partiality. If it would appear to a reasonable person that a judge has knowledge of facts that would give him an interest in the litigation then an appearance of partiality is created even though no actual partiality exists because the judge does not recall the facts, because the judge actually has no interest in the case or because the judge is pure in heart and incorruptible. The judge’s forgetfulness, however, is not the sort of objectively ascertainable fact that can avoid the appearance of partiality. Hall v. Small Business Administration, 695 F. 2d 175, 179 (5th Cir. 1983). Under section 455(a), therefore, recusal is required even when a judge lacks actual knowledge of the facts indicating his interest or bias in the case if a reasonable person, knowing all the circumstances, would expect that the judge would have actual knowledge." 796 F. 2d, at 802.

Liljeberg v. Health Services Acquisition Corp., 486 US 847, 860-862 (1988)(quoting the Second Circuit).

So it goes with Ken Feinberg.

What will it take to fix that? Personally, I don’t think we need to know every detail, but we do need to know more.

I don’t need to know exactly how much he is being paid, but I do want to know if it is (a) hourly or fixed and (b) if it is significantly above or below his normal rate. Those two elements could, potentially, create an incentive either to draw out the work or to hurry through the claims to get back to his more profitable work.

Do I think he will do that? No, but that’s not the issue: the issue is if it appears that his judgment could be affected by his compensation, and I think it’s fair to say such an appearance exists. The victims of the spill — the ones who are being asked to trust his judgment — deserve to know a little more before they sign on.  

Judicial supremacy made an unexpected comeback this week with Martin Feldman of the Eastern District of Louisiana, a "fair" and "terrifying" judge (who, for what it’s worth, dismissed one of my cases a few months ago — no hard feelings), granting an injunction against the Secretary of the Interior from enforcing the Obama administration’s moratorium on deepwater oil drilling because the moratorium was "arbitrary and capricious:"

After reviewing the Secretary’s Report, the Moratorium Memorandum, and the Notice to Lessees, the Court is unable to divine or fathom a relationship between the findings and the immense scope of the moratorium. The Report, invoked by the Secretary, describes the offshore oil industry in the Gulf and offers many compelling recommendations to improve safety. But it offers no time line for implementation, though many of the proposed changes are represented to be implemented immediately. The Report patently lacks any analysis of the asserted fear of threat of irreparable injury or safety hazards posed by the thirty-three permitted rigs also reached by the moratorium. It is incident specific and driven: Deepwater Horizon and BP only. None others. While the Report notes the increase in deepwater drilling over the past ten years and the increased safety risk associated with deepwater drilling, the parameters of “deepwater” remain confused. And drilling elsewhere simply seems driven by political or social agendas on all sides. The Report seems to define “deepwater” as drilling beyond a depth of 1000 feet by referencing the increased difficulty of drilling beyond this depth; similarly, the shallowest depth referenced in the maps and facts included in the Report is “less than 1000 feet.” But while there is no mention of the 500 feet depth anywhere in the Report itself, the Notice to Lessees suddenly defines “deepwater” as more than 500 feet.

… The Shallow Water Energy Security Coalition Presentation attempts at some clarification of the decision to define “deepwater” as depths greater than 500 feet. It is undisputed that at depths of over 500 feet, floating rigs must be used, and the Executive Summary to the Report refers to a moratorium on drilling using “floating rigs.” Other documents submitted summarize some of the tests and studies performed. For example, one study showed that at 3000psi, the shear rams on three of the six tested rigs failed to shear their samples; in the follow up study, various ram models were tested on 214 pipe samples and 7.5% were unsuccessful at shearing the pipe below 3000psi. How these studies support a finding that shear equipment does not work consistently at 500 feet is incomprehensible. If some drilling equipment parts are flawed, is it rational to say all are? Are all airplanes a danger because one was? All oil tankers like Exxon Valdez? All trains? All mines? That sort of thinking seems heavyhanded, and rather overbearing.

… While the implementation of regulations and a new culture of safety are supportable by the Report and the documents presented, the blanket moratorium, with no parameters, seems to assume that because one rig failed and although no one yet fully knows why, all companies and rigs drilling new wells over 500 feet also universally present an imminent danger.

On the record now before the Court, the defendants have failed to cogently reflect the decision to issue a blanket, generic, indeed punitive, moratorium with the facts developed during the thirty-day review. The plaintiffs have established a likelihood of successfully showing that the Administration acted arbitrarily and capriciously in issuing the moratorium.

Ashby Jones at the WSJ Law Blog has been all over the story, with lots of followup links and questions about Judge Feldman’s oil industry investments.

I don’t agree with the ruling; the government’s assumption, as worded by Judge Feldman, "that because one rig failed and although no one yet fully knows why, all companies and rigs drilling new wells over 500 feet also universally present an imminent danger" is sound. We still don’t know why the "failsafe" measures on the Deepwater Horizon failed to be safe. Although the government’s conclusions included a number of inconsistencies, it’s hard to argue that the government’s chosen remedy — the moratorium — was not rationally related to the compelling national interest of limiting the amount of oil in the Gulf of Mexico to the millions of gallons already there.

But let me play devil’s advocate for a moment. From a purely legal standpoint, the order isn’t extraordinary. Although the writ of habeas corpus is rightly called "the Great Writ" by virtue of its ability to force the federal and the states’ governments alike to release an individual from confinement, the Great Writ’s less heralded cousin civil context is the Administrative Procedures Act, which is almost constitutional in its breadth and power:

 To the extent necessary to decision and when presented, the reviewing court shall decide all relevant questions of law, interpret constitutional and statutory provisions, and determine the meaning or applicability of the terms of an agency action. The reviewing court shall—

 
(1) compel agency action unlawfully withheld or unreasonably delayed; and

(2) hold unlawful and set aside agency action, findings, and conclusions found to be—

(A) arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law;
(B) contrary to constitutional right, power, privilege, or immunity;
(C) in excess of statutory jurisdiction, authority, or limitations, or short of statutory right;
(D) without observance of procedure required by law;
(E) unsupported by substantial evidence in a case subject to sections 556 and 557 of this title or otherwise reviewed on the record of an agency hearing provided by statute; or
(F) unwarranted by the facts to the extent that the facts are subject to trial de novo by the reviewing court. 

5 U.S.C. § 706.

There it is, plain as day, a statute enacted by the Congress the President empowering (commanding, some might say) federal judges to set aside any decision by any federal agency — the means by which the President and his Cabinet effectuate their policies — if they find that agency action to be "arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law."

That’s why the exercise of this power is not, by itself, noteworthy: it’s exactly how our government’s checks and balances are supposed to function. As another check on the system, despite some suggestions otherwise, federal appellate courts (like the Fifth Circuit) can and do engage in a searching analysis of injunctions. See Karaha Bodas v. Perusahaan Pertambangan Minyak, 335 F. 3d 357, 363-364 (5th Cir. 2003)(Reversing injunction, noting "Even though the ultimate decision whether to grant or deny a preliminary injunction is reviewed only for abuse of discretion, a decision grounded in erroneous legal principles is reviewed de novo. … We have cautioned [that] a preliminary injunction is an extraordinary remedy which should only be granted if the party seeking the injunction has clearly carried the burden of persuasion on all four requirements. As a result, the decision to grant a preliminary injunction is to be treated as the exception rather than the rule.")

As favorable as the Fifth Circuit sometimes is to oil interests, there’s good odds they would likely have reversed this injunction and sent it back for the District Court to craft a more limited remedy that preserved the moratorium against any oil platforms that were comparable to, or had comparable risks of, the Deepwater Horizon.

But the main point here is what happened as a result of the order: the Secretary of the Interior announced he would issue a new, more detailed, possibly more narrowly-crafted moratorium. And that’s just what the APA was designed to do: to limit the ability of the federal government’s agencies to impose their will on people, to force them to "refine" their actions when necessary. Moreover, at the moment, no additional damage is being done to the Gulf, and Judge Feldman has scheduled a conference call this morning to consider staying his injunction while the Department of the Interior appeals his ruling and issues a new moratorium.

Thus, as critical as I might be of the reasoning of the order, the fact of the order is something to herald: for once, your government is functioning the way it is supposed to.

Some background: the Oil Pollution Act establishes strict liability for anyone who spills oil, but limits that liability in the case of offshore rigs to $75 million per spill, plus removal costs. Congress has contemplated removing those caps for the BP spill and all future spills.

Over at the National Law Journal, David Ingram reports that BP, in addition to spilling oil and other substances all over the Gulf of Mexico, is now blowing smoke in the Washington, DC vicinity:

A private consultant for energy companies told Congress on Tuesday that any effort to rewrite oil spill liability laws retroactively would likely face a legal challenge based on breach-of-contract claims.

W. Jackson Coleman, managing partner of EnergyNorthAmerica, said that if successful, those breach-of-contract claims could cost the federal government billions of dollars in payments to the oil and gas industry.

Coleman testified at a hearing of the Senate Judiciary Committee, which is considering legislation to lift limits on damage awards. A former lawyer for the Interior Department and for Republicans on the House Committee on Natural Resources, Coleman said the drilling leases purchased by oil and gas companies are contracts with the federal government, and that the contracts were signed with certain expectations about liability.

He said there is ample precedent for companies to sue when the federal government changes the terms of those leases.

In 2000, for example, the U.S. Supreme Court ruled that the federal government had to return $158 million to Mobil Oil Exploration & Producing Southeast Inc. and Marathon Oil Co. after Congress passed a law limiting drilling off the Outer Banks of North Carolina. Justice Stephen Breyer wrote for an 8-1 majority in the case, Mobil Oil Exploration v. United States. Coleman worked on the case when it was before the U.S. Court of Federal Claims and he was at the Interior Department.

"Certain expectations about liability?"

Since when could you sue the United States government for monetary damages over your "expectations" about its laws?

The Mobil Oil Exploration case was an entirely different situation. There, the government sold a bunch of leases and then passed laws that precluded them from complying with certain terms of the leases. Such is, undoubtedly, a breach of contract: the government did not do what it contracted to do.

In the Gulf of Mexico, BP bought leases from the United States government to conduct offshore drilling. The government complied with every last word of those lease contracts. All on its own, BP screwed up and initiated the revenge of the dinosaurs.

The fact that BP bought the leases with the "expectation" that they would be subject only to the liability caps in the Oil Pollution Act is irrelevant. The government changes its laws all the time, including those relating to liability. In MGM v. Grokster, for example, the Supreme Court invented a wholly-new cause of action for "contributory" copyright infringement, putting Grokster out of business.

In one sense, though, these arguments over the Oil Pollution Act may be a tempest in a teapot, or I suppose a drop in the bucket.

First, the Oil Pollution Act’s caps don’t apply if the spill was caused by "gross negligence or willful misconduct" or "the violation of an applicable Federal safety, construction, or operating regulation." From the little bit we know about Transocean using seawater instead of mud or cement, and about the impotence of the "failsafe" blowout preventer, at least one of those is going to be met, possibly all of them.

Second, there are a lot of ways to sue BP; the common law of Texas, Louisiana, Mississippi, Alabama, and Florida all allow full recovery under negligence and trespass claims when a person is damaged by someone else’s irresponsible conduct.

Did Halliburton improperly cement the drill hole at Deepwater Horizon? Did Transocean fail to activate the blowout preventer — or were the shear rams too weak to crimp pipes designed for deepwater drilling? Why didn’t BP have any contingency planning in place for a spill of this magnitude?

Whatever the cause, my hometown of Ocean Springs, Mississippi, already smells like crude oil, and the oil itself is on the way.

That wasn’t supposed to happen, not in a supposedly high-tech, sophisticated, safety-conscious industry with redundant environmental protections in place.

So what next?

If you’ve been affected, you don’t need a lawyer to pursue some of your claims. As the White House Blog posted yesterday:

BP is now accepting claims for the Gulf Coast oil spill. Please call BP’s helpline at 1-800-440-0858. A BP fact sheet with additional information is available here. For those who have already pursued the BP claims process and are not satisfied with BP’s resolution, can call the Coast Guard at 1-800-280-7118. More information about what types of damages are eligible for compensation under the Oil Pollution Act as well as guidance on procedures to seek that compensation can be found here

The Coast Guard website has a little bit more detail about the types of compensation available here. If you’re on the Gulf Coast, you should start keeping a journal of any expenses / damages you have due to the oil spill that fit those criteria.

You don’t need a lawyer, but you should have one, in my opinion. The Oil Pollution Act doesn’t cover personal injury or non-economic damages. Moreover, BP has every incentive to low-ball their estimates of the claims. BP already has been running around trying to trick people — including people volunteering to help the cleanup effort — into signing away their rights for less than $5,000.

Though you can call the Coast Guard if you don’t like BP’s estimate, and though the Coast Guard wants to be fair to you, truth is, it’s not their job to advocate for you.

That would be your lawyer’s job. Your lawyer will raise questions like: how can BP claim they will fairly value your claim when most of the damage has yet to be done?

Which brings us to the lawsuits. Dozens of putative class actions have already been filed. Let’s take a look at the claims being advanced.

Gulf Shores West Beach Investments et al. v. BP, Transocean, Halliburton, and Cameron International, in the Southern District of Alabama, alleges negligence, "wantonness," nuisance, and strict liability.

Carrone and Landry v. BP et al., in the Eastern District of Louisiana, alleges negligence and violation of the Oil Pollution Act. 

Parker et al. v. Transocean et al., in the Southern District of Mississippi, alleges "negligence, gross negligence, willfully, wanton and careless disregard for the plaintiffs" (as a single claim) and strict liability.

You might be wondering: why are all the claims different? Don’t the lawyers know what they’re doing?

In short: the lawyers don’t care if they get the claims right at this point. They want to be appointed the lawyers for the whole class of plaintiffs, and to try to get that they’re in the oft-derided "race to the courthouse." 

Alabama, Louisiana and Mississippi are all in the Fifth Circuit, where, as a general matter:

The first-to-file rule is based on "principles of comity and sound judicial administration." Save Power Ltd. v. Syntek Fin. Corp., 121 F.3d 947, 950 (5th Cir. 1997). It "requires federal district courts — courts of coordinate jurisdiction and equal rank — to exercise care to avoid interference with each other’s affairs." West Gulf Maritime Ass’n v. ILA Deep Sea Local 24, 751 F.2d 721, 728 (5th Cir. 1985).

"Under the first-to-file rule, when related cases are pending before two federal courts, the court in which the case was last filed may refuse to hear it if the issues raised by the cases substantially overlap." Cadle Co. v. Whataburger of Alice, Inc., 174 F.3d 599, 603 (5th Cir. 1999) (citing Save Power, 121 F.3d at 950; West Gulf Maritime, 751 F.2d at 728). The rule vests in the court in which the first of the two related actions was filed the responsibility of "determin[ing] whether subsequently filed cases involving substantially similar issues should proceed." Sutter Corp. v. P & P Indus., Inc., 125 F.3d 914, 920 (5th Cir. 1997). Therefore, the second-filed court should usually stay, dismiss, or transfer the action over which it is presiding in deference to the first-filed court. See West Gulf Maritime, 751 F.2d at 729 & n.1, 730. This enables the court in which the first related action was filed to "decide whether the second suit filed must be dismissed, stayed or transferred and consolidated." Sutter Corp., 125 F.3d at 920.

Twin City Insurance Company v. Key Energy Services, C.A. H-09-0352 (United States District Court, S.D. Texas, Houston Division)(2009).

Some lawyers read language like the above and, as a matter of habit, throw together a slapdash complaint the moment they see bad news in the papers.

This strategy used to work, and there are indeed old cases in which the class counsel was chosen almost entirely on the basis of the first-to-file.

But those days are behind us, and the first-to-file rule has little influence in the selection of class counsel these days. As the Third Circuit’s Task Force Report on the Selection of Class Counsel quoted from a Delaware securities fraud case,

Although it might be thought, based on myths, fables, or mere urban legends, that the first to file a lawsuit in this Court wins some advantage in the race to represent the shareholder class, that assumption, in my opinion, has neither empirical nor logical support.

Too often judges of this Court face complaints filed hastily, minutes or hours after a transaction is announced, based on snippets from the print or electronic media. Such pleadings are remarkable, but only because of the speed with which they are filed in reaction to an announced transaction. It is not the race to the courthouse door, however, that impresses the members of this Court when it comes to deciding who should control and coordinate litigation on behalf of the shareholder class.

Indeed, with the Class Action Fairness Act — which puts class actions worth more than $5 million (with a few additional requirements) in federal court — the governing rule for most major class actions these days is Federal Rule of Civil Procedure 23(g), which says:

(g) Class Counsel.

(1) Appointing Class Counsel.

Unless a statute provides otherwise, a court that certifies a class must appoint class counsel. In appointing class counsel, the court:

(A) must consider:

(i) the work counsel has done in identifying or investigating potential claims in the action;

(ii) counsel’s experience in handling class actions, other complex litigation, and the types of claims asserted in the action;

(iii) counsel’s knowledge of the applicable law; and

(iv) the resources that counsel will commit to representing the class;

(B) may consider any other matter pertinent to counsel’s ability to fairly and adequately represent the interests of the class;

Nothing about first-to-file.

Considering that the courts are supposed to evaluate "counsel’s knowledge of the applicable law," I have to wonder how lawyers think the courts in these oil pollution cases will react when they see lawyers file slapdash complaints that, like two examples of the above, don’t even cite the Oil Pollution Act? (Mistakes abound on that Act, too, like among the lawyers quoted this Business Week article, who ignored the limitations of the Oil Pollution Act, such as the absence of personal injury damages and the caps on damages unless the plaintiffs prove misconduct.)

* * *

One of the best parts of being a plaintiff’s lawyer is that you get to be selective with your cases. You can take cases that inspire you. We’ve been in touch with environmental lawyers down on the Gulf Coast about the prosecution of these cases — it takes a lot cooperation, resources and determination to take on companies with combined annual revenues around a quarter-trillion dollars — and are setting up triage for cases here.

If you’re looking for a couple quick bucks out of BP, call 1-800-440-0858.

If you’re looking to fight for full, adequate and just compensation, drop me a line.