In this five-part podcast series, I consider the use of monitors by state Attorneys General. I am joined in this podcast series by Jerry Coyne, the Managing Director of State Monitoring Services at Affiliated Monitors, Inc. who is the sponsor of this podcast series. In this series we introduce the role of state Attorneys Generals as enforcers of state law and bringers of civil litigation; the reaction to the big-tobacco settlement and the criticism of state Attorney Generals over that process; multi-state settlements in the post-tobacco era; challenges in multi-state litigation and the road ahead. Today, in Part 3, we consider the role of state Attorney Generals in multistate litigation in the post-tobacco era.

Despite the challenges posed by the tobacco settlement, state AGs used the new-found collective power to exercise their jurisdiction in a number of areas. However, settlement of these cases became more complicated than it had been before as no defendant wanted to become “the next tobacco” or more specifically, the next potential deep-pocket for the state AGs to target. While governors and legislators certainly wanted to take advantage of this new potential revenue stream, a number of states took steps to limit the circumstances when the AG could hire outside counsel, or to regulate the selection process through which a counsel could be retained.

Although the legal challenges to the hiring of outside counsel in the wake of the tobacco settlement had largely been unsuccessful, one of the first cases in which a state Supreme Court specifically ruled on the issue was the appeal of Rhode Island’s litigation against the lead paint industry. While allowing the hiring of outside counsel on a contingent fee basis, the Supreme Court said the state AG must be the decision maker on all critical decisions in the case. Other jurisdictions have generally followed this ruling, allowing the hiring of outside counsel as long as the AG remains in ultimate control of the litigation that was, after all, brought in the name of the state.

At the same time the right of the AG to hire counsel was challenged, various business and industry groups also attempted to make future litigation targets less financially appealing to the states. One method of limiting the deep pockets of a defendant was for a settling defendant to attempt to tie any monetary damages to the subject matter of the litigation. Had this theory been used in the tobacco litigation, for example, settlement funds could have been used for public health purposes, or for enforcement, but could not have been used by a state’s general fund, for a purpose such as paving and maintaining public highways.

To guard against a legislature scooping such settlement funds, defendants began to request that the terms of a consent judgment memorializing a settlement specifically include this directed spending. The theory was that the failure to follow such a direction would be a violation of a court’s order rather than simply violating an agreement.

Defendants also became concerned with the possibility of settling a pending case, only to have additional states which had not participated in that litigation subsequently file similar causes of action. The fear was that the evidence produced by the defendant in the initial suit, as well as the result of that suit, would make it far more difficult to defend subsequent litigation. In addition, the costs of defending litigation would potentially continue for years, until the last state either filed suit, or was no longer legally able to. As a result, the preference emerged for defendants to settle with all states, whether or not a state had actually filed suit.

Post-Big Tobacco Actions

Car Tires

One of the first suits in which this preference was displayed was when several states filed a suit against Firestone Tires and Rubber Company after motorists in a number of warmer jurisdictions had experienced tires spontaneously blowing out while they operated their vehicle. Perhaps being sensitive to the complaint that state AGs had become ‘like any other personal injury firm’ several states in which no motorists had experienced this situation did not join the litigation. Yet, when Firestone was preparing to settle, it ensured that all states were part of the settlement, which, although increasing the cost of the settlement, gave the company the closure it sought.

Mortgage Industry

The more significant challenge to the settlement of multi-state litigation, however, came from attempts by the states to find some method of controlling defendants’ future conduct. In 2012, for example, the nation’s five largest mortgage servicers agreed to a $25 billion settlement over some questionable mortgage loan servicing and foreclosure practices, including the so-called robo-signing activities that came to light in late 2010. Robo-signing refers to the practice of signing mortgage documents without verifying their accuracy as well as other procedural errors. At the time, the five mortgage servicers, Bank of America Corp., JPMorgan Chase & Co., Wells Fargo & Co., Citigroup, Inc. and Ally Financial, formerly GMAC, collectively serviced nearly 60 percent of the US mortgage market. While mortgage loan servicers collect and process mortgage payments and handle defaults and foreclosures, the servicers often do not own the underlying loans.

The national mortgage settlement, which involved more than a year of negotiations with the state AGs, the Department of Justice (DOJ) and other federal agencies, included direct payments to the federal government, the participating 49 states and individual borrowers. Despite the size of this settlement, none of the five defendants closed their business.

Big Pharma

More recently, a number of states have filed actions against manufacturers of generic pharmaceuticals,claiming that those defendants conspired with each other to keep the prices of certain generic drugs artificially high, thus depriving consumers of the expected lower cost benefit that one would typically expect once a medicine becomes available as a generic drug.

In the case of pharmaceuticals, it is not disputed that the medicines at the core of this litigation serve a critical medical purpose to the consumers who use them. To put the manufacturer of a drug out of business may result in a more limited availability of a crucial medication. So, while this suit remains pending, the closure of a manufacturer/defendant should not be anticipated due to the vital service it provides.

So how does one control the future conduct of a business that has been successfully sued for its past fraudulent activities? Clearly, imposing money damages is not enough. Although historically there was a belief that civil litigation against a corporate wrongdoer and the awarding of monetary damages would remove the financial incentive to do wrong, that has proven not to be the case.

t is necessary, as it was in the case of tobacco, to identify conditions necessary for the company to continue to do business. Once those conditions are identified, a structure must be created, or identified if one already exists, that can report whether such conditions are being followed. In a national settlement, however, these conditions must be examined over in up to fifty states and six territories. While the successfully resolved multi-state tobacco litigation gave the state AGs new collective power to enforce laws across the nation, in the years immediately following the settlement the method to enforce these multi-state settlements remained a work in progress.

I hope you will join us tomorrow for Part 4, where we discuss the challenges of multi-state into today’s litigation environment.

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