|BUSINESSWEEK ONLINE : JANUARY 29, 2001 ISSUE|
The Litigation Machine
Smoking-gun documents over the Internet. Lawsuit kits. Easy financing. The result: Plaintiffs' lawyers are having a field day. Here's an inside look.
The ''Firestone Tire Tread Separation'' litigation packet is one legal bestseller you won't find in bookstores. Sold by the Association of Trial Lawyers of America (ATLA), the powerful Washington trade group that serves as the tort bar's central brain trust, the closely guarded 689-page document is distributed only to plaintiffs' attorneys. A step-by-step guide to suing Bridgestone/Firestone Inc. (BRDCY) and Ford Motor Co. (F), the litigation packet starts with a breezy synopsis of the tire debacle. It then proceeds to offer readers everything they need to get a lawsuit started: There are 59 complaints from previously filed tread-separation cases that, with a few changes to reflect local law, can be recycled anywhere in the country. Also included are a list of documents to request from Firestone, a package of useful National Highway Traffic Safety Administration documents, and a directory of several informative Web sites.
One happy customer is Dale K. Perdue, a partner at Clark, Perdue, Roberts & Scott, a 10-attorney firm in Columbus, Ohio. Although he still doesn't have any tire-blowout clients, Perdue readily shelled out $145 for the CD-ROM version of the litigation packet (the paper copy, which can't be cut-and-pasted, sells for $175). The product ''saves you the time of reinventing what has already been invented,'' he says. ''It also lets you know who's out there doing the work, so you can establish networks with those people and share intelligence.''
If Perdue ever gets a piece of the tire action, he'll have no trouble buying everything else he needs to win a big verdict. By typing the words ''Firestone'' and ''tread separation'' into a search engine on DepoConnect.com, a Web site that can be accessed only by plaintiffs' attorneys with passwords, it's possible to get the names of expert witnesses who specialize in tire failures--as well as full copies of their prior courtroom and deposition testimony. If Perdue or his client need money, Atlanta's ExpertFunding.com and American Asset Finance of North Haledon, N.J., will gladly offer cash in exchange for a stake in any ultimate recovery. And the secretive Attorneys Information Exchange Group (AIEG) will provide the most important thing of all: damning internal documents that show just how much Ford and Firestone knew about the dangers of their products. The AIEG's library of auto-industry documents is so vast that plaintiffs' attorneys sometimes surprise opponents with embarrassing memos and engineering studies that the car companies' own lawyers have never seen.
Welcome to the new world of assembly-line litigation. Suing Corporate America is a big business. While there are no authoritative data, a conservative estimate of total annual plaintiff-lawyer income, based on information culled from the Internal Revenue Service, ATLA, and industry consultants, is at least $25 billion. Add the value of the judgments they win for victims and corporate-defense expenditures, and the sum goes much higher. Tillinghast-Towers Perrin, a management consultant with a specialty in insurance issues, estimates that the overall annual cost of the American tort system, including payments to injured people, legal fees, and administrative expenses, was at least $165 billion in 1999. That was about 2% of gross domestic product--twice as much as in most industrial countries.
SMART STASH. As the money has escalated, tort lawyers have succeeded in turning litigation into an all-but-automated process. Litigation packets are now available for products ranging from handguns to the Warner-Lambert Co. diabetes drug Rezulin to the gas additive methyl tertiary-butyl. Empowered by the Internet and enriched by a never-ending stream of lottery-size verdicts and settlements, tort lawyers have built an ingeniously organized industry that operates, for the most part, well out of the public eye.
This reality is at odds with the popular perception of plaintiffs' lawyers. Everybody knows they make a pile of money, but in books and movies such as A Civil Action, Erin Brockovich, and The Rainmaker, tort attorneys are generally portrayed as lone, idealistic Davids taking on massive, team-counseled corporate Goliaths. There are long nights in the law library, impassioned pleas to frightened whistleblowers, and deep digs into haystacks of meaningless corporate documents to search for one smoking gun.
Sometimes, it still happens that way. But most lawsuits are managed with the ruthless efficiency of Wal-Mart Stores Inc.'s (WMT) distribution network. Mere hours after a big company such as Ford Motor, Microsoft (MSFT), or American Home Products (AHP) gets into trouble, plaintiffs' attorneys can churn out dozens of suits across the country. Meanwhile, coalitions of class-action law firms can mount sophisticated, multipronged legal, political, and mass-media attacks against entire industries--and can drive multibillion-dollar companies into bankruptcy. ''These people fly around in bigger jets than we do,'' says Robert W. Pike, executive vice-president and secretary at Allstate Insurance Co. (ALL) ''This is no longer a cottage industry.''
The advent of assembly-line litigation has fundamentally changed the balance of power in America's courthouses: Plaintiffs' lawyers are gaining the upper hand. In spite of some isolated tort-reform victories, companies are finding it harder than ever to defend themselves. ''If it's a 15-round fight, I sort of have a feeling that we're around the 10th round,'' says Thomas A. Gottschalk, senior vice-president and general counsel at General Motors Corp. (GM) ''The corporate side has won a couple of rounds, but I think the plaintiffs' side has so far won more than the defense.''
That's a big reason why Corporate America is leaning on President-elect George W. Bush to push tort reform. During the campaign, he promised to clamp down on plaintiffs' attorneys by changing some of the ground rules for litigation. For example, Bush wants to force people who file suits to pay for the other side's legal expenses if they lose--a move that would make it much harder for private citizens to take on big companies and one that is fiercely opposed by most Democrats. But in the final months of the campaign, Bush de-emphasized tort reform, and the issue appears to have drifted to a lower rung on his list of priorities. And given the narrowness of his victory, the prospects for far-reaching legislation appear to be doubtful.
Is the power of the plaintiffs' bar a bad thing? That depends on the underlying merits of each case. Where there has been serious corporate misconduct, as has been alleged in the tire-blowout cases, the existence of paint-by-numbers lawsuits makes it easier for injured people to win the compensation they deserve. It also makes it harder for big companies to get away with such underhanded tactics as destroying documents or stonewalling victims.
UGLY SIDE. And make no mistake: Corporate America is hardly defenseless. Big companies such as GM, Allstate, and DuPont (DD) have more than 100 in-house lawyers apiece, plus dozens of outside firms on retainer. They also have giant budgets and plenty of their own high-tech resources. Chicago's Defense Research Institute, for instance, offers an online library containing files on 50,000 expert witnesses. ''They have the same type of databases we do,'' says Richard H. Middleton Jr., a former president of ATLA. The plaintiffs' bar simply wants ''to level the playing field.''
But not every lawsuit is as strong as the tire cases appear to be. The same litigation packets, internal documents, and expert-witness testimony that support a legitimate lawsuit can be used to buttress a seemingly bogus case. That's the ugly side of the litigation machine (page 122). Plaintiffs' lawyers have become so skilled that they can make good money on clients who have suffered little if any real injury. (Because the cause of the tire problem has not been fully investigated, and because individual accidents have varying explanations, Ford and Firestone are challenging the extent of their legal culpability for the blowout problem.)
Such flimsy cases impose unnecessary costs on Corporate America and waste the time of overworked judges. But that's not all they do. Tort suits, after all, are more than simply business propositions for plaintiffs' lawyers. They are also, by definition, attempts to regulate corporate behavior. When attorneys allege that trucks roll over too easily or that health-maintenance organizations' cost-cutting efforts go too far, they are essentially asking judges and juries to set new safety standards--above and beyond those established by state and federal agencies.
That troubles many executives and scholars, who worry that a case launched as a money-making venture for a small band of tort lawyers can have vast regulatory implications. The problem, says George L. Priest, a professor of law and economics at Yale Law School, is that courts aren't particularly well situated to make broad policy decisions. Judges and juries have no technical expertise, are shown a limited amount of evidence, and make many decisions behind closed doors. Litigation can be ''a parody of the regulatory process,'' says Priest.
Of course, harsh critiques of the plaintiffs' bar have been aired for years. But it certainly isn't hurting them much on the ground--tort attorneys are making more money than ever. There's the familiar story of the tobacco bonanza, which yielded more than $10 billion in legal fees (payable over several years). But in addition to the handful of attorneys who tapped that gold mine, there are plenty of other plaintiffs' lawyers who are making a fortune. Securities-fraud kingpins Melvin Weiss and Bill Lerach were recently forced to reveal, during a trial in Chicago, that they earned an average of about $12 million a year apiece from 1994 to 1998. Many of the more successful TV and billboard legal personalities make $2 million to $5 million annually.
Those sums dwarf the earnings of most corporate defense attorneys. In Altman Weil Inc.'s 2000 survey of Law Firm Economics, plaintiffs' contingency firms were shown to have more net income per lawyer ($365,941) than any other specialty, including commercial litigation ($282,733), intellectual property ($190,944), and labor ($189,226). The possibility of windfall verdicts and settlements is a big reason that star defense lawyers such as David Boies, Fred Bartlit Jr., and Stephen Susman have started to take on plaintiffs' contingency cases.
That's not to say tort law is always an easy way to make a living. Plaintiffs' attorneys invest all their time and money in a case up front and then may have to wait years for a payoff. It can be a scary, boom-bust, oil-wildcatter kind of business. Lawyers usually drill a lot of dry holes and try to tide themselves over with a few gushers. More than a few, like Jan Schlichtmann in the best-seller A Civil Action, are driven into bankruptcy.
EVENING THE SCALES. Traditionally, plaintiffs' attorneys have had two key disadvantages in their war against Corporate America: They were outnumbered, and they were outspent. To even the scales, tort lawyers have made amazing advances--particularly in the crucial arenas of research, teamwork, and finance. As a result of this unheralded management revolution, a sole practitioner based in a Buffalo strip mall can fight on equal terms with a company boasting bigger revenues than a Third World country.
The most breathtaking gains have been made in the automation of legal research. If this is the Information Age, then law is the quintessential information business. Lawsuits, after all, are built on little more than words: precedents, theories, witness testimony, and smoking-gun documents. All this can be shuttled around the Internet with incredible efficiency. So it's hardly surprising that a host of Web sites has emerged to help plaintiffs file suits. At the members-only site sponsored by ATLA Exchange, the organization's litigation-support division, tort attorneys can share tactical advice with fellow lawyers, view a database of verdicts and settlements, and browse through a library of court documents. ATLA Exchange recently bolstered its inventory by offering attorneys $5 for every internal corporate document, brief, or deposition they sent in.
The true temple of plaintiffs' lawyer research, though, is the little-known Attorneys Information Exchange Group, which has its own Web site at aieg.com. Housed in a nondescript office building in Birmingham, Ala., the nonprofit cooperative supports lawyers suing car, motorcycle, truck, boat, and other types of transportation companies. The AIEG is founded on a simple principle: Every time one of the group's 600 members unearths interesting corporate documents in a lawsuit, they should all be forwarded to a central repository to be shared with other lawyers.
The result is a remarkably powerful litigation tool, a sort of Library of Congress for the internal paperwork of dozens of companies. How many documents are in the AIEG? ''Too numerous to count,'' says President-elect Donald H. Slavik, a Milwaukee attorney. In addition to internal corporate documents, the AIEG gathers court papers and technical literature. Much of this collection has been digitized and coded, so the documents are searchable by company, employee name, year, or product. ''We are a bank of information,'' says Slavik. ''We encourage our members to send us as much material as possible.''
SPIES. One weapon companies often deploy to discourage the dissemination of sensitive documents they hand out in litigation is the protective order. But the AIEG manages to get around that problem, in many cases, by asking members to negotiate for protective orders that give them the right to share documents with other plaintiffs' attorneys. As a result, the AIEG database has vast quantities of information that ordinary civilians, and even government regulators, never see.
Consider the Ford-Firestone suits. Long before the issue made headlines, long before Congress forced the companies to turn over documents related to the disaster, the AIEG had accumulated 400,000 pages of material on the topic. In early September, as the story was exploding nationally, AIEG tire subgroup Chairman Tab Turner was able to swiftly pull together more than 70 internal Ford and Firestone documents dating back to 1987 and create a chronological history of the companies' alleged awareness of the alleged defect. Listing e-mails, memos, test reports, customer complaints, and correspondence between the companies, the chronology was given to auto-safety advocate Joan Claybrook, who delivered it to the Senate Commerce Committee on Sept. 12. Almost every media story about allegedly smoking-gun documents during that period was based on documents that had been available to AIEG members for months.
Just as the AIEG specializes in transportation, there are other plaintiffs' groups that warehouse documents from other industries. ATLA's railroad, breast-cancer, and vaccine litigation groups, for example, all have their own private document libraries. Each of these organizations is paranoid about security and takes elaborate precautions to prevent nonmembers from learning about its operations. To join the AIEG, lawyers have to get two references from other plaintiffs' attorneys and sign a notarized affidavit that they don't do any corporate work. The AIEG then sometimes follows up with its own investigation. Why is all this necessary? Because corporate lawyers have a history of posing as plaintiffs' attorneys and trying to infiltrate closed ATLA meetings. In 1995, a defense lawyer was discovered at a private meeting of ATLA's breast-implant litigation group at a hotel in Dallas, according to Mike Hugo, a Boston trial lawyer who chaired the group at that time. He says the intruder was expelled but never subjected to any legal or disciplinary actions.
AIEG member Robert L. Langdon, based in Lexington, Mich., says the group doesn't just aid plaintiffs--it also helps keep Corporate America honest. Last year, for example, he lost a personal-injury suit against Toyota Motor Corp. (TM) involving a woman whose back was broken when her 1992 Corolla slid on ice into an oncoming truck. At an AIEG meeting in San Antonio soon thereafter, one of his partners discovered that the auto company had failed to turn over all of the relevant collision tests it had conducted. Langdon submitted the new evidence to the judge, who determined the material could have changed the way the jury ruled, and ordered a new trial. (Toyota outside counsel Stephen M. Strum says the tests were withheld by mistake and actually supported the company's case.)
The AIEG illustrates the second thing that tort lawyers have gotten a lot better at: working together. Plaintiffs' law firms are, from a corporate perspective, small businesses. The biggest have barely 100 attorneys and $50 million in annual revenues. Most ATLA members work for partnerships that have fewer than five attorneys and earn under $3 million a year. To compensate for their small size, tort lawyers have built an extensive network of mostly invisible alliances.
At the heart of this network are the ATLA litigation groups. According to a directory distributed at the organization's July annual meeting, ATLA has 61 of them, covering everything from automatic-door malfunctions to defective toys to tap-water burns. These groups form almost immediately after a new product-liability disaster, have regular closed-door meetings, and often maintain their own document depositories like the one at the AIEG. Sometimes, the groups spawn subgroups focusing on one company. The section devoted to helping victims of parking-lot crime, for example, has a 75-member unit focused exclusively on suing Wal-Mart.
The ATLA litigation groups are just the tip of the iceberg. There are also independent networks of plaintiffs' firms that band together to share the cost of pretrial research and wage coordinated attacks on companies in multiple courts. Many of the firms that attacked Big Tobacco, for example, have also joined together to attack HMOs, the lead-paint industry, and carmakers.
The inner workings of these syndicates are a closely kept secret. But the operations of one group were inadvertently exposed when the minutes of a 1995 meeting of the Complex Litigation Committee (CLC), a network that included Seattle's Hagen & Berman and San Francisco's Lieff, Cabraser, Heimann & Bernstein, along with several other firms, were mistakenly turned over to defense counsel. The document revealed that members paid $10,000 apiece to join and that the group assigned individual firms to investigate the feasibility of suits against several industries. If a case got the green light, teams would split the legal work and report back at regularly scheduled meetings. Shortly after the existence of the CLC came to light, members say, it was disbanded.
MONEY CRUNCH. One of the main reasons plaintiffs' attorneys hook up is to share the cost of a big suit. Not all lawyers belong to rich syndicates such as the CLC. And clients frequently face their own money crunch. Even if they are clearly victims of corporate negligence, it can take up to three years or more before they ever see a verdict check. In the face of steep medical costs, they're vulnerable to a hardball defendant offering a quick, cheap settlement.
Now this problem is giving rise to a new financial industry. Small, private firms such as ExpertFunding.com, American Asset Finance, and San Francisco's Law Finance Group buy stakes in lawsuits from attorneys and clients--acting, in essence, as legal venture capitalists. It's a high-risk, high-reward business. If the case is dismissed, they don't get a dime. But if the plaintiff hits the jackpot, lenders can triple their investment. The companies also give attorneys ordinary business loans and buy out clients' annuity settlements for lump-sum payments.
Over the past 12 months, ExpertFunding.com has made about 500 litigation advances, ranging in size from a few thousand dollars to more than $500,000, according to founder and Chief Executive Officer Michael Douglas. Although most big financial institutions are afraid to bet on litigation, Douglas says the risk can be managed. He has developed a detailed screening process that involves investigating the client's medical history, the facts of the case, and the relevant law. Douglas claims the company strikes out on only 2% of the cases it invests in. ''The [defendants] have billions of dollars to spend and can afford to play the waiting game,'' he says. ''This lets plaintiffs' lawyers compete on an equal basis.''
While the fees are steep, plaintiffs' lawyers and their clients have been more than willing to pay. One client is Christy R. McKinney, an Alma (Ark.) woman who claims she became a quadriplegic when a Firestone tire on her Ford Bronco blew out on her 21st birthday. (Both companies say there has been limited factual investigation of the case and deny liability.) McKinney is scheduled to go to trial against Ford and Firestone later this year. Meanwhile, her family is borrowing $5,000 a month from Covington (Ky.) litigation-finance firm Providence Inc.
While they will have to pay the company back twice what it invested, McKinney's attorney, Fred E. Stoops Sr., is confident the ultimate verdict will be more than ample. He'll ask the jury to force the two companies to pay for a lifetime health plan that will cost $15 million to $20 million. Additionally, he will seek compensation for her pain and suffering. ''These two companies have stolen her life,'' says Stoops. ''What's that worth?'' Then he will ask the jury to assess punitive damages. He's aiming high. ''Punitive damages are measured relative to the net worth of the corporation,'' says Stoops. ''But I don't think they should be so high that they put the companies out of business.''
Bankruptcy for Ford and Firestone? Isn't that a little grandiose for a guy who works for a small law firm in Tulsa? Chapter 11 for Ford is a long shot, to be sure. But Bridgestone/Firestone investors are spooked. More than 400 suits have already been filed, and many of these cases have allegations just as heart-rending as the ones in the McKinney suit. Working with raw material that was less sensational, tort attorneys drove Dow Corning, Johns Manville (JM), and several asbestos-related companies into bankruptcy. After plaintiffs' lawyers predicted last month that total damages in the tire suits may reach $50 billion, enough to potentially swamp Firestone, shares of Tokyo-based parent Bridgestone fell nearly 30%. That's a tribute to the power of legal entrepreneurs like Fred Stoops. Yes, plaintiffs' lawyers are big talkers. But these days, Corporate America is listening.
By MIKE FRANCE
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The Litigation Machine
COVER IMAGE: The Litigation Machine
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TABLE: Tort Lawyers' Secret Weapon
On the Prowl for Victims
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