Blog: Commentary
Next steps in the fight against “tort tourism” and a fraudulent $18 billion judgment
Trial lawyers seeking to enforce an ill-gotten $18 billion foreign judgment against Chevron today might feel one step closer to carrying out their plan to enforce the fraudulent judgment here and abroad, after the U.S. Supreme Court on Tuesday left in place a narrow, procedural ruling from a lower court. But the trial lawyers shouldn’t start counting their dólares just yet – those who respect the rule of law still have a number of arrows in the quiver to challenge one of the most blatant examples of “tort tourism,” ever.
As a quick refresher, here’s how Chamber CEO and President Tom Donohue recently explained this case to Investors Business Daily:
In 2003, Chevron Corporation was sued in Ecuador for environmental damage allegedly caused by Texaco's oil operations a decade earlier, even though Texaco — which Chevron acquired in 2001 — had ceased operations in Ecuador in 1992 and had settled any outstanding claims for environmental cleanup with the Ecuadorian government in 1994.
Nevertheless, in February 2011, an Ecuadorian judge ordered Chevron to pay $8.6 billion in damages. Incredibly, the judge increased that amount to $18.6 billion because the company refused to publicly apologize within 15 days of the judgment. It is the largest award ever by a foreign court against an American company.
Chevron has no assets in Ecuador, so the plaintiffs' lawyers engaged in some tort tourism. They devised a plan to collect the judgment wherever Chevron did business.
First stop — the United States. Chevron, with ample evidence that the Ecuadorian judgment had clearly been procured by fraud, won an injunction from a federal court in New York that would have, among other things, prevented collection of judgment in the United States. That injunction was overturned by a higher court [the U.S. Court of Appeals for the Second Circuit].
The Second Circuit’s decision basically required Chevron to wait to raise its arguments against enforcement of the ill-gotten $18 billion judgment until after the plaintiffs affirmatively attempt to enforce it. Last June, the Chamber’s litigation arm, the National Chamber Litigation Center, asked the U.S. Supreme Court to overturn the Second Circuit’s ruling, but yesterday, the U.S. Supreme Court “denied certiorari,” or declined to review the case.
There’s no doubt that the plaintiffs will move forward, full-steam, with their efforts to carry out a plan (which they have dubbed “Invictus”) to attempt to enforce the Ecuadorian judgment in foreign courts, and once they do, Chevron will have an opportunity to challenge
Nonetheless, this latest chapter in the soap-opera-like-lawsuit once again underscores the need for meaningful and timely relief for Chevron and other companies who are the victims of “tort tourism.” Tort tourism is a relatively recent trial lawyer strategy that involves filing lawsuits abroad against U.S. companies in countries with very little respect for the rule of law. The trial lawyers then hop from global jurisdiction to global jurisdiction attempting to enforce the foreign judgments. When I’m a tourist, I generally bring home t-shirts and mugs as souvenirs – trial lawyers bring home multi-billion-dollar judgments.
What can we do about this? The solution will require an effort on all fronts to fight fraud: the courts, Congress, you name it. The business community must continue to support efforts in the courts to prevent enforcements of fraudulent judgments. An important next step in the fight against tort tourism, such as the Ecuador case, should be federal legislation to eliminate the patchwork of inconsistent , permissive and conflicting state laws that currently govern recognition of foreign judgments. We need a single federal law that is clear, uniform, and modern — one that recognizes foreign judgments only when arrived at in a fair, reasonable and legal manner.
Tort tourism comes with tremendous costs – and not just those born by defendant companies and their shareholders. A fraudulently obtained $18 billion judgment in the pockets of trial lawyers means $18 billion that can’t be spent on adding value to the company, creating and maintain jobs, and other worthwhile investments. Another troubling cost of tort tourism is that it will only serve to further erode respect for the rule of law, a fundamental cornerstone of an effective and respected legal system – which is absolutely essential for companies around the globe to be able to conduct business.
Tuesday’s Supreme Court decision is another eye-opener to awaken all of us to the threats posed by tort tourism.
Pennsylvania’s Poor Lawsuit Climate Puts Keystone State at Crossroads
The problem is not going unnoticed. For a decade now, my organization, the U.S. Chamber Institute for Legal Reform, has been measuring how businesses view the litigation climates in the fifty states. In the latest survey, conducted by Harris Interactive, a leading global polling firm, Pennsylvania is ranked 40th out of 50, a six-place drop from 2010 and a record low for the Commonwealth. And most of the blame for this decline can be laid at the doorstep of Philadelphia’s courts, which are ranked as the fifth worst in the entire country.
The biggest problems in the Philadelphia court relate to lawsuits brought by out-of-state plaintiffs. It’s a general principle of the civil justice system that cases should be tried in the jurisdiction where the injury occurred or where the plaintiff or defendant resides. Yet in today’s Philadelphia courts, lawsuits are routinely filed by plaintiffs who have little or no connection to the city against defendants with only a tangential presence.
In fact, a few years ago, some Philadelphia judges publicly encouraged out-of-state plaintiffs to file in Philadelphia. As a result, in 2011, nearly half of all asbestos cases and more than 80% of pharmaceutical cases filed in Philadelphia were from out-of-state plaintiffs.
The contrast could not be more dramatic from the courts just a short drive away in Delaware. For the ninth straight time, Delaware’s lawsuit climate was ranked as the nation’s best in the Harris survey. The state’s courts received high marks in many areas, including overall fairness and enforcing venue requirements.
At the opposite end of the spectrum is another state bordering Pennsylvania, West Virginia. That state, ranked dead last in our past four surveys, has been plagued by a legal system that features massive verdicts and no meaningful appellate review for civil cases.
So Pennsylvania has the unique distinction of bordering both the highest and lowest ranked states in the survey. Unfortunately, because of the problems in the Philadelphia court, the Commonwealth’s legal climate has more similarities to last-ranked West Virginia than top-ranked Delaware.
A bad lawsuit environment has real costs for states trying to grow their economies and create jobs. Seventy percent of those questioned in this year’s survey said their companies look at a state’s legal environment as one of the factors when deciding where to locate or expand their business, the highest percentage in five years.
Luckily, there are many ways for Pennsylvania to improve its legal climate. Already, the new leadership of the Philadelphia court has taken initial steps to limit out-of-state cases, though much more needs to be done. In addition, the Pennsylvania legislature is considering a variety of legal reforms that could lead to a fairer legal system.
A better legal environment could produce a real dividend for Pennsylvania. According to a study conducted last year by NERA Economic Consulting, improving Pennsylvania’s legal climate to the level of Delaware could reduce tort costs by up to $1.7 billion per year, translating to as many as 90,000 new jobs.
Those benefits are real and substantial. But they will not be realized unless Pennsylvania takes action to improve its legal environment. Only then will the birthplace of the American republic have a justice system that would make the Founders proud.
Why Are Hedge Funds Allowed to Invest in Litigation?
When we think of our system of justice, we might envision the heroic small town lawyer, Atticus Finch, in To Kill a Mockingbird. Or the jury deliberations in 12 Angry Men. Or the countless other movies, TV series, and high school civics textbooks that depict the U.S. justice system as a uniquely virtuous pillar of American society.
Unfortunately, that glorified image of the U.S. justice system is at odds with today's reality. In far too many instances, today's civil justice system is utilized not as a means for delivering justice but as a potential profit center -- in other words, less Atticus Finch and more Gordon Gekko, the rapacious investor in Oliver Stone's Wall Street.
We see this play out in some class action lawsuits, where the class members receive token awards while their lawyers walk away with millions. It is also visible in the millions of dollars spent every year by the plaintiffs' bar on advertising, a practice once prohibited for lawyers.
And this troubling trend could be accelerated by a new development: the spread of third-party litigation financing, or TPLF.
You probably haven't heard of TPLF. It's a fairly recent creation, originating in Australia and now landing on the shores of the U.S. In essence, TPLF is the practice of hedge funds and other investment firms providing funds to plaintiffs' lawyers in order to conduct litigation. If the case is won in court or settled, the investor is repaid out of the proceeds of the lawsuit, usually with an extremely high rate of return. The investors, therefore, have a direct stake in the outcome of the case.
Proponents of TPLF say that providing this new funding stream increases access to the courts. But U.S. courts are already widely accessible. For instance, a plaintiff can hire an attorney on a contingency fee basis, a practice that is prohibited in most other developed countries.
While TPLF is not necessary to increase access to U.S. courts, it does create a whole new set of problems and conflicts of interest for litigants, their attorneys, and society at large.
Let's start with the litigants. TPLF supporters allege that the practice is risk-free for plaintiffs, since, if they lose, they typically don't have to repay the investor. But more than 95 percent of U.S. civil cases end in settlements rather than going to trial. And a closer look at one recent case demonstrates major dangers for plaintiffs if they accept a settlement that's less than that demanded by the investor.
In this case, a Texas-based security company, DeepNines, obtained an $8 million loan from a TPLF firm to fund patent litigation against a competitor. In the end, DeepNines received a $25 million settlement. However, because of the terms of the TPLF contract, the investor received $10.1 million of the settlement, while DeepNines, after paying attorneys' fees, netted less than $800,000 -- only about 3 percent of the total settlement amount.
To add insult to injury, the investor then turned around and sued DeepNines for settling for an amount below what the investor's financial models suggested they could receive. The case was eventually resolved through a confidential settlement.
Like Gordon Gekko's insider trading machinations, the DeepNines example shows that many TPLF contracts are rigged in favor of investors. For instance, the contracts often provide for "waterfall" payouts -- meaning that the TPLF investors take a higher percentage of the first dollars of settlement, while the plaintiff's share only rises as the total settlement figure reaches an amount pre-set by the investors. Thus, plaintiffs are pressured to hold out for settlements or judgments far above what they would have accepted otherwise in order to satisfy their investors. And defendants suffer as well, since they are forced to contend with longer and costlier litigation. This scenario stands the justice system on its head by putting the investor in the driver's seat while hurting the primary parties in the case.
In the DeepNines case, the plaintiff still had substantial control of the lawsuit. But when it comes to class actions and other multi-plaintiff lawsuits, it is the investment firms, not the plaintiffs, that often appear to be in control.
For example, a leading TPLF firm invested $4 million in a high-profile, controversial lawsuit brought by Ecuadoran plaintiffs against the Chevron Corporation. The firm's contract stipulated that it would have veto power over the choice of attorneys and also receive precedence over the plaintiffs in the disbursement of any settlement or judgment funds. In all, the firm stood to earn tens of millions of dollars in the event of a successful settlement or judgment.
As for the Ecuadoran plaintiffs, their contract specified that they would receive the balance of any settlement or judgment only after eight different tiers of funders, attorneys, and "advisers" were paid first. It is unclear whether they knew what they were signing up for; according to Fortune magazine, several plaintiffs acknowledged their approval of the 75-page TPLF contract with merely a fingerprint.
Late last year, the funder announced it was ending its involvement in the Chevron case. This occurred months after a U.S. District Court judge in New York issued an opinion finding ample evidence of fraud by the plaintiffs' attorneys in the case.
All this suggests that the Chevron Ecuador case is being primarily driven by funders and plaintiffs' attorneys, not the actual plaintiffs. As with the DeepNines case, this situation makes a mockery of our system of justice by placing the profiteering of outside investors ahead of the interests of the parties in court.
TPLF also creates significant problems for lawyers. Lawyer Ethics 101 states that lawyers have a fiduciary duty to their clients. But this fundamental relationship is jeopardized when a third-party funder enters the picture. For one thing, when TPLF investors get involved in a case, they often front the plaintiffs' attorneys' fees. So when an attorney is managing a case, will they act in the best interests of their client, as they are supposed to do, or in the interests of the third-party funder paying their salary?
In addition, at least one court has determined that attorney-client privilege doesn't apply to communications between third-party investors and attorneys. So if an investor asks an attorney for sensitive information about a case it is funding, that information could be subpoenaed by the opposing party and used against the plaintiff.
So we've seen how TPLF benefits funders and hurt litigants. But the biggest loser from TPLF might be society at large. This is because we all rely on an impartial civil justice system to resolve disputes in a fair and expeditious manner. When TPLF debases that system by putting investor profits ahead of justice, society is the loser.
It's time for policymakers to step up to the plate and curtail this practice, particularly in the context of class action litigation. While by no means a cure-all for the problems facing the U.S. justice system, it can help nudge the system away from the values of Gordon Gekko and back toward those of Atticus Finch. Because when it comes to the delivery of justice, greed is not good.
This op-ed was originally published by TheAtlantic.com on July 3, 2012 as part of its “America the Fixable” series in partnership with Common Good.
Facts on the FACT Act
Last week, the U.S. House Judiciary Committee favorably reported the Furthering Asbestos Claims Transparency (FACT) Act of 2012. The FACT Act is common-sense, bipartisan legislation that would simply require the personal injury settlement trusts established by bankrupt asbestos lawsuit defendants to file quarterly reports with the bankruptcy courts that describe their claims. It would also require trusts to respond to still-solvent asbestos litigants’ requests for information on claims. Opponents of the FACT Act contend that it is unnecessary because there is no evidence of widespread fraud in the trust system and that the bill would somehow diminish victims’ rights. They’re wrong on both counts.
First, independent experts at the Government Accountability Office and RAND Institute for Civil Justice have studied the trusts and concluded they are susceptible to abuse. This isn’t a purely academic or theoretical concern as opponents of the bill claim. Specious claims against trusts have emerged throughout the country, and witnesses at hearings held by the Committee detailed questionable trust claims exposed in the course of litigation in Louisiana, Maryland , New York, Ohio, Oklahoma, and Virginia. Indeed, a judge in Delaware recently raised serious concerns over the inconsistent claims being advanced by asbestos lawyers by noting that “the core of this case has been fraudulent.” Unfortunately, this may be just the tip of the iceberg. By shedding light on the claims filed against the trusts, the FACT Act will simultaneously deter and allow the detection of questionable claims.
Second, counter to the misinformation of its opponents, the FACT Act would strengthen victims’ interests. The legislation requires trusts to share information that would normally be publicly available, like names and alleged exposure histories. It preserves asbestos victims’ ability to file legitimate lawsuits or trust claims, and it protects individuals’ privacy by prohibiting the release of confidential medical records, social security numbers, and other personal information protected by existing bankruptcy laws. Furthermore, the bill’s reporting requirements would ensure that trusts have sufficient funds to pay legitimate claims by rooting out fraud in the system. To claim otherwise is simply smoke and mirrors.
The bottom line? The FACT Act is simple legislation that would make the asbestos trust system more transparent and benefit legitimate asbestos victims.
House Judiciary Committee Passes Asbestos Trust Transparency Bill
Today, the U.S. House Judiciary Committee passed the “Furthering Asbestos Claims Transparency (FACT) Act of 2012,” which would require asbestos bankruptcy trusts, established to pay current and future asbestos personal injury claims, to report claimant filing information on a quarterly basis to the federal bankruptcy courts.
We commend the House Judiciary Committee for bringing much needed transparency to a broken asbestos compensation system that is largely driven by the growing number of asbestos bankruptcy trusts operating in secrecy throughout the country. The opaque nature of the trust system, and its inherent lack of accountability, has created perverse incentives for the trial bar to abuse the system for pecuniary gain. Indeed, over the past several years, more and more instances of troubling specious claiming have come to light where asbestos lawyers have submitted inconsistent claims in the tort system when compared to what is being said to the various bankruptcy trusts.
This bill’s reporting requirements would ensure that trusts have sufficient funds to pay legitimate claims by rooting out fraud in the system. We therefore urge the full House to pass the bipartisan FACT Act swiftly.
Mississippi Governor Signs Landmark Outside Counsel Sunshine Law
Today Mississippi Governor Phil Bryant signed legislation promoting transparency and capping contingency fees when the state attorney general, a state agency, or elected officials hire outside private plaintiff attorneys to represent the state.
Through its ‘sunshine’ law, Mississippi took a significant step to rein in the troublesome practice of awarding contingency fee contracts to plaintiffs’ lawyers who are also major campaign contributors to the state attorney general.
Such ‘pay-to-play’ schemes enrich lawyers at the expense of taxpayers and raise significant concerns about conflicts of interest, favoritism, the use of a public entity for personal gain, and fairness in prosecutions.
With this new law, Mississippi joins a vanguard of states like Arizona, Florida and Indiana who have led the effort to open the relationships between state attorneys general and private lawyers hired to work with them to public scrutiny. Governor Phil Bryant, Lieutenant Governor Tate Reeves, Speaker Philip Gunn, Senator Briggs Hopson, and Representative Mark Baker are to be commended for their leadership.
Correct the Foreign Corrupt Practices Act
The Foreign Corrupt Practices Act bars U.S.-based and U.S.-traded companies from giving things of value to foreign government officials or their surrogates in order to gain a competitive advantage — a worthy law whose goals have wide support from American businesses.
But more than 30 years of experience with the law and an increasingly global economy have shown some weaknesses which, if corrected, could improve compliance and raise business standards.
For example, companies should be rewarded for strengthened compliance. If a U.S. company buys a foreign company, discovers that company violated the FCPA and then corrects the wrongful business practice, the parent company should not then be smacked with an enforcement proceeding for conduct occurring before the merger.
If a U.S. company with a strict compliance program learns low-level employees of a foreign subsidiary broke company policies, investigates, stops and reports that conduct, there is no assurance today that the company will not still be indicted.
In countries like China where the government is a partner in every business, how does a U.S. firm determine who is and is not considered a government employee? Does the U.S. firm violate the FCPA by bringing a Chinese factory manager to the United States for training?
Merely being charged with an FCPA violation can destroy a company's market value and prevent it from doing business with the government and other customers. Most cases are decided not in court but in prosecutors' offices, where costly settlements substitute for risky legal fights. Thus, some companies have not pursued foreign business development or exited foreign countries altogether, leaving the field to less scrupulous foreign competitors.
Unambiguous guidelines from the government, including information about cases it declines to prosecute, can help. Standards are then clearer, and companies can operate in compliance knowing they will not be charged unfairly if they disclose, and correct, unlawful conduct.
Some suggest that increased FCPA enforcement has proved the law's utility without the need for changes. But the opposite is true: Aggressive enforcement has alerted business and the courts alike to its flaws. That is why clarifying the FCPA has drawn bipartisan support. Without clear standards, American businesses will begin to cede global markets to less ethical foreign competitors, making America less competitive and costing jobs.
Former U.S. attorney general and federal judge Michael B. Mukasey is a partner with Debevoise & Plimpton LLP. He represents the U.S. Chamber Institute for Legal Reform with regard to the Foreign Corrupt Practices Act.
This column first appeared in USA Today.
Does Arbitration Offer Better Access to Justice for Consumers?
Arbitration is a fair way of resolving claims, according to the testimony of Victor Schwartz (which he discusses in the nearby video) on behalf of the U.S. Chamber Institute for Legal Reform. Studies have shown that consumers fare just as well, if not better, when they take their claims to arbitration rather than litigation, and arbitration proceedings are resolved more quickly and with lower transaction costs. The procedure gives consumers a fair, cost-effective forum to resolve smaller disputes that are not financially viable for litigation.
According to Schwartz, arbitration is a threat to the trial lawyers’ business plan. These lawyers don’t want to litigate small claims – they want to bundle as many claims as possible together into a class action to drive up the settlement value and their fees with it. However, a vast majority of claims are individualized and would not qualify for class consideration. And even if they are one of the rare cases that can be grouped into a class, few consumers bother to submit the complex forms necessary to obtain recovery.
Hiring a lawyer on a contingency fee basis to go to court instead of arbitration can cost a consumer up to 50 percent of any eventual reward – and that’s only if they can find an attorney. Studies have shown what most of us already know – plaintiffs’ lawyers will only take a case if they believe there is both a substantial chance of success and a potential recovery that will justify their expenses. Some studies show that lawyers will not take a case if the claim is worth less than $60,000. Since the vast majority of arbitration claims involve small sums, the elimination of pre-dispute arbitration could force consumers to spend more on a lawyer than their claim is worth. In addition, arbitration can be a much more expeditious procedure than litigation, which could take years to resolve in our increasingly overcrowded court system.
Ultimately, arbitration lets consumers and employees resolve their claims in an affordable, timely, and accessible forum. Eliminating pre-dispute arbitration would be good for trial lawyers but bad for everyone else.
Madison County, Illinois Ends Controversial Asbestos Docket System
Madison County Circuit Judge Clarence Harrison has ended the pre-assignment of asbestos trials to plaintiffs’ law firms. Trials will instead be set on a case-by-case basis. The decision comes three months after Judge Barbara Crowder, whose campaign committee received $30,000 from plaintiffs’ lawyers shortly after she awarded their firms most of the court’s 2013 trial times, was removed from the asbestos docket.
We applaud Judge Harrison for ending Madison County’s longstanding and troubling practice of assigning asbestos trial slots to plaintiffs’ lawyers rather than to individual plaintiffs.
This system created an asbestos lawsuit futures market of immense value and was at the root of the "cash-for-trials" scandal that lead to the reassignment of the docket’s previous presiding judge.
By ending a practice that effectively put Madison County court time up for sale, Judge Harrison has taken an important first step towards cleaning up the court’s misguided approach to resolving asbestos lawsuits.
Legacy lawsuits are costing Louisiana jobs
Louisiana's oil and gas industry supports a tremendous number of direct and indirect jobs, is the fourth-largest producer of crude oil and is one of the nation's top producers of natural gas.
However, the current legal environment in Louisiana is harming the oil and gas industry and the state economy due to legacy lawsuits -- suits seeking a financial windfall for alleged environmental damage claims by certain landowners. Such lawsuits are unique to Louisiana, and discourage oil and gas exploration and production. But it doesn't stop there.
The LSU Center for Energy Studies recently released a report concluding that legacy lawsuits have cost Louisiana 1,200 new oil and gas wells over the past eight years, $6.8 billion in lost drilling investments and 30,000 jobs. Also due to the suits, Louisiana has lost $1.5 billion in wages for those directly and indirectly employed in the oil and gas industry, according to the study.
Legacy lawsuits are not a new problem for the oil and gas industry. A 2003 Louisiana Supreme Court decision triggered an exponential increase in the volume of cases filed.
In 2006, after several subsequent exorbitant damage awards, the state Legislature passed ACT 312, requiring a public hearing to determine the most feasible plan to clean up a given property.
These stipulations were put in place prior to any trial to neutralize plaintiffs' lawyers' ability to game the system. However, the trial bar is now manipulating the process by placing the public hearing at the end of the litigation. This allows plaintiffs' lawyers to deprive Louisiana juries of the government's objective valuation of property damage, thus enabling them to slap their own price tag on it to later extract inflated settlements.
Legacy lawsuits are having a detrimental impact on the future growth of the oil and gas industry in Louisiana. By 2010, of the top 50 crude oil producers in the state, 28 companies had been named in legacy lawsuits.
The burden on the jobs will continue to grow until these lawsuits end and the loopholes surrounding ACT 312 are closed.
This article first appeared as a letter to the editor in The Times-Picayune.
