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Washington State Attorney General Rob McKenna announced yesterday that he would join in a multi-state (eleven and counting) suit by States challenging the recently passed health care bill on constitutional grounds arguing that the law's requirement that everyone purchase health insurance is an unconstitutional expansion of the federal government's authority in violation of the 10th Amendment and the Commerce Clause. McKenna argues that the U.S. Attorney General is unlikely to raise any of these constitutional infirmities and that that job of raising these constitutional questions thus falls to the states. His announcement triggered Washington State Governor Christine Gregoire to announce that she would launch her own legal challenge arguing that the state attorney general does not represent the state in making such claims. McKenna responded that he is a separately elected constitutional officer under the state constitution.

Those of us with long memories may recall that way back when, when the state AG's, with then-Washington state AG Gregoire in the forefront, decided to bring a multi-state lawsuit against the tobacco industry, a similar state constitutional stand-off in Mississippi led to its Republican governor suing Mississippi's Democratic AG Michael Moore arguing that the Chief Executive of the State had to authorize any such suit both as a matter of state constitutional law and the requirements of the applicable federal law.

Both the passage of the legislation and the suits contemplated by the eleven states prompted this careful press release by Connecticut Attorney General and current U.S. Senate candidate Richard Blumenthal, who praised the historic legislation, but carefully noted that "most of the federal health care legislative provisions will not take effect for several years, providing time to review and improve the law, if necessary." Blumenthal, with his finger in the wind, deftly added, "I have received no official request from an authorized state official to challenge federal health care legislation -- but we will review such a request if we receive it."

Both Republican supporters of such state suits and Democratic opponents thereof are likely to stumble over their own past positions, with Democrats hard pressed to say that these eleven states have no business regulating national policy matters, and the Republicans facing claims that they are now a bunch of activist state AGs overstepping their powers. And did Gregoire or Blumenthal ever take the position that they required permission from the governor to bring the host of state AG regulation through litigation actions for which they have received such public notoriety and press acclaim?

The health care bill, and challenges thereto, is likely to engender both state and federal constitutional lawsuits that could tie up the courts and enrich countless attorneys for years. If there is one lesson to be learned from this, it is that any legislation that promises to drag such litigious mischief in its wake, is usually a bad idea to begin with.

Walter Olson recently posted on key points made in an important article by George Krueger and Judd Serotta about cy pres settlements in the August 6, 2008 Wall Street Journal. In a nutshell, these "cy pres" proceedings represent a new species of legal activity whereby judges assign portions of lawsuit settlements or recoveries to non-party persons or entities chosen by them as somehow approximating the goal of the legal proceeding. (Long-time POL contributor Ted Frank has recently published a scholarly article on this new phenomenon.) These "approximation" awards are just one aspect of the larger problem created by regulation through litigation -- though a particularly alarming one. Point of Law has numerous contemporaneous prior posts on these developments. These cy pres practices are even more widespread and far-reaching than those attorneys report, and suffer from manifold constitutional and legal infirmities.

The good news? Any student in a high school civics class can recognize this racket.

Krueger and Serotta's central point is that these wealth transfers by judges of millions of dollars extracted from defendants in our state and federal courts given to institutions like legal aid societies or universities which were never injured, who possess no standing to sue, and who are chosen in an ad hoc and unreviewable process violate the federal Constitution's case and controversy clause. These ad hoc remedies additionally violate state and federal constitutions's due process clauses and that legal infirmity should be addressed before a case proceeds to settlement or trial, not at some much later date when a judge is trying to figure out what to do with millions of undistributable cash paid by a class action defendant. (I am indebted to Martin Newhouse, President of the New England Legal Foundation, for articulating this latter point.)

Kreuger and Serotta limited their discussion to private class action suits. But this practice of cy pres distribution is in widespread use by state and federal governmental officials, and represents an unconstitutional abuse of power. Consider a few examples:

  • In 2004, Mass. AG Thomas Reilly sued Walgreens, Home Depot and Wal-Mart for violations of state "item pricing" regulations" that arise when a shopper picks up an unmarked item or an item that is marked $3.19 but is charged $3.59 at the checkout. Rather than try to return such zero-to-trifling amounts of money per incident to the injured consumers, the state hired class action lawyers and richly compensated them. According to the Boston Globe, the proposed settlement involved the payment of $3.2 million to the private attorneys, $3.9 million to "an eclectic group of charitable, consumer, and nonprofit groups," and $425,000 to the AG's Office. The list of favored groups "includes $150,000 for the Massachusetts Bar Association, $120,000 each for the American Heart Association, the American Cancer Society, and the Juvenile Diabetes Research Foundation; $100,000 each for the National Consumer Law Center, the Roscoe Pound Institute of Washington, the New England Patients' Rights Group, and the attorney general's office; $50,000 for Public Citizen, and $40,000 for the Greater Boston Jewish Coalition for Literacy." (See earlier POL post by Mike DeBow) Meanwhile the overcharged consumers get nothing. (To add irony to idiocy, a recent detailed study shows that the item pricing laws themselves raise retail prices for consumers in states that have such laws.)
  • The U.S. attorney for New Jersey, Christopher J. Christie, entered into a deferred prosecution agreement ("DPA") with Bristol-Myers Squibb because of a potential securities violation for inflating its quarterly earnings by a business practice known as channel-stuffing. As an article in the Wall Street Journal noted, "[t}he naive reader might think that a DPA should prohibit the firm from engaging in future conduct of the sort that got it into hot water in the first place." (Richard Epstein, The Deferred Prosecution Racket, WSJ, 11/28/06). The "most striking evidence of the abuse of power is paragraph 20 of the agreement, which requires Bristol-Myers to endow a chair at Seton Hall University School of Law," Mr. Christie's alma mater, "for teaching business ethics."
  • West Virginia AG Darrell McGraw's office appointed special assistant attorneys general and outside counsel to sue pharmaceutical companies and software giant Microsoft, among others and received multi-million dollar recoveries. But the settlement dollars don't make their way into the state's treasury for the Legislature to disperse. Although an editorial from the Wheeling Intelligencer called it a "disturbing philosophy" that the AG's "office keeps the money - millions of dollars." The editorial stated. "He ought to turn the windfalls over to the state treasurer, of course ... McGraw seems to view the money as his own personal hole card in the popularity contest that politics can be."
    McGraw's free-wheeling exercise of the power of the purse has drawn the wrath not only of state legislators, but the federal government. Kim Strassel of the Wall Street Journal reports:
    Mr. McGraw had sued on behalf of state agencies (including the state's Medicaid program) -- yet his office kept the rest of the settlement money.The federal government, which pays a significant portion of the state's Medicaid bills, remains furious the program received none of the settlement, and is now threatening to withhold millions in Medicaid money. . . .[Nonetheless] Mr. McGraw remains relatively popular in the state, in part because one of his greatest innovations has been the art (as with the OxyContin suit) of turning settlement proceeds into political patronage. When the West Virginia attorney general crafts a settlement, he makes sure it goes to his own office, where he doles it out with great fanfare to universities, health-care centers and county commissions. In January, he grandly announced that a $12 million settlement he'd negotiated with Visa and MasterCard would be going to fund statewide sales-tax holidays.

These cy pres arrangements represent a complete breakdown of the rule of law. In addition to violating the case and controversy and/or due process provisions of state and federal constitutions, they violate the doctrine of separation of powers. Recoveries in lawsuits brought by governmental entities belong to the state or federal treasury and may be expended only by the legislature.

  • Do high heels cause schizophrenia? In Scared Senseless, Ronald Bailey reviews Geoffrey C. Kabat's recent book entitled Hyping Health Risks, in which this and other, more influential health scares such as electromagnetic fields, cancer clusters, radon gas, passive smoking exposure, cell phones, flu shots and the like are analyzed in the context of the economics and incentives of current science research practice and funding. Dr. Kabat, who found himself in the midst of heated controversy over the funding of his own smoking research, provides a knowledgeable window into the conjunction of science, the public health media, and law.
  • Can a 100 year old book long sunk into obscurity, once heralded as a landmark study of American political society, offer a fresh insight into our political culture? The current New Yorker provides a fresh assessment of Arthur Fisher Bentley's TheProcess of Government: A Study of Social Pressures and asks the important question, does the wrangling of interest groups corrupt politics - or constitute it? The article takes on Thomas Frank's latest attempt to tell the benighted U.S. electorate that they don't know what they are doing.
  • What does that Harvard MBA actually teach you? More importantly, what do its possessors do to our markets? In what is described as a "horrifying and very funny memoir," Ahead of the Curve, Philip Delves Broughton immerses himself in the weird culture of entitlement, decadence and fatuous therapeutics including "bonding games," "personal development exercises" and other biz school antics. The review closes with:
  • "this wonderful bit of data from a study by a banking analyst who tried to track the American equity markets in relation to the number of HBS graduates who chose to go to work in finance each year. If the figure was less than 10%, the market went up not long after. More than 30% and the market was headed for a crash. In 2006, Mr. Broughton reports, 42% of the HBS grads went to work in finance. Right on schedule."
  • Ask yourself, would you design a system of higher education like this?:
    First, we will set up a single goal to represent educational success, which will take four years to achieve no matter what is being taught. We will attach an economic reward to it that seldom has anything to do with what has been learned. We will urge large numbers of people who do not possess adequate ability to try to achieve the goal, wait until they have spent a lot of time and money, and then deny it to them. We will stigmatize everyone who doesn't meet the goal. We will call the goal a "BA."
    Charles Murray proposes a new way of thinking about higher education that tuition-strapped parents and loan-laden students might want to do some hard thinking about before blindly chasing today's prohibitively expensive and increasingly devalued bachelor's degree.

Today's Wall Street Journal reports on an alarming judicial coup proposed by the ABA:

According to the proposal, future federal judges would be selected not by an elected President, but with the aid of home-state Senators and a bipartisan commission that would provide a list of recommended nominees for judicial vacancies. The White House would then select a candidate from the preapproved list. The commission would be created by the two Senators from each state to offer up consensus choices for federal nominees.

Right. Just what we need. Less democratic accountability and more influence from the self-proclaimed "fourth" branch of lawyers into the selection of judges. As the opinion piece notes, states that have experimented with this so-called "merit" (paging Mr. Orwell) selection of judges have found that back-room, lawyer-controlled lists were being forced on the political, accountable branches. The ABA's past record of deeming "unqualified" judges who do not conform with its expansionist view of judicial power makes it a particularly compromised and unqualified arbiter.

The ABA is nothing more than a trade group for an already too-influential profession and its proposal to give itself, and ultimately an unelected lawyer-loaded commission, a role of this constitutional magnitude is what they politely call hubristic.

Around the Web - August 13, 2008

Employment Law
Micro-inequities such as not getting a chummy nickname or being taken out to lunch are the focus of a recent ABA journal article claiming they have a big work impact.

Are we all disabled now? Shyness as a disability. And more on ADA abusers, arguing that such abuses will ultimately harm legitimate disability claims.

Green Fatigue, Global Warming and the Therapeutic Something or Other

Yikes! You know carbon footprints are stepping on toes when not one, but two New York Times bloggers confess to green fatigue and concerns about a nanny nation.

NYU medical school clinic prescribes house plants for allegedly polluted indoor air, sunflowers for soil believed to contain lead, window treatments, tadpoles and succulents - to help people translate their environmental anxiety into concrete action. This clinician has a lab coat, a mock medicine cabinet, but no M.D. The New York Times describes her as an artist, designer and engineer to whom patients can bring their environmental concerns for her prescriptions. A professor of environmental medicine at the NYU School of Medicine describes this as a service that is needed to show people that they can "do something" about these anxieties. And who is subsidizing this?

In light of the above, a recent Wall Street Journal opinion piece on global warming as public hysteria - is recommended reading - and re-reading.

"That's Not Blight. It's New Jersey"

Today's Wall Street Journal reports that last Thursday, a three judge panel of the New Jersey Appellate Division "actually sided with ordinary homeowners over a greedy local government and developer:

In their ruling, the judges unanimously reversed a lower-court decision giving the city of Long Branch a green light to pursue its redevelopment plan. That has put a serious crimp into the city's hopes for taking the homes of about a dozen longtime residents -- and turning them over to a developer to put up luxury condos in their place.

Institute for Justice attorneys represented the homeowners in this rebuke to Kelo.

The State of Connecticut has brought suit against Bank of America's newly acquired Countrywide Financial Corp. alleging that Countrywide made loans that were unaffordable or unsuitable to the borrower in violation of the state's unfair trade practices and banking laws. Countrywide was recently acquired by B of A in a $2.5 billion deal last month. The lawsuit seeks civil penalties of as much as $100,000 per violation of the state banking laws and $5,000 per violation of the state consumer protection laws, disgorgement of allegedly ill-gotten gains and an order compelling the company to cease the disputed practices.

The Connecticut suit follows suits brought in June by the States of California, Illinois and Washington against the lender. The Connecticut Post further reports that the state AG seeks not only to halt all foreclosure activity by Countrywide, but undertake the extraordinary remedy to undo past foreclosures. In an interview, Blumenthal stated that "he would also attempt to return foreclosed homes, when possible, to people who lost them as a result of these unscrupulous loans. . . .If the houses have already been sold to other families, Blumenthal said, the state will seek enough compensation to enable those who unjustly lost their houses to get another one." "We're talking hundreds, likely thousands, of families," Blumenthal said. Blumenthal said he has asked Bank of America, Countrywide's parent company, to suspend all foreclosure activity until this issue can be resolved. Banking Commissioner Howard Pitkin said that the suit could suddenly leave a lot of people free of mortgages, and that the lawsuit seeks to invalidate not only subprime loans, but borrowers who took equity lines of credit on their houses.

If the loan was unsuitable and the borrower by definition unable to afford the home, Connecticut now seeks to reward the borrower with a mortgage free home, invalidation of duly commenced foreclosure sales and invalidation of too risky home equity loans. And if the foreclosed home is already gone, the AG seems to be saying Countrywide's successor's has got to provide a replacement home for the borrower. It will be interesting to see if the AG can deliver on these promises and important to track who pays for these extraordinary government-provided handouts and further who benefits from the state suits.

Another nagging question. Will Connecticut's AG apply the same regulatory zeal to Connecticut Democratic Senator and Chairman of the Senate Banking Committee Christopher Dodd's, sweetheart home financing deal with Countrywide that reportedly reduced the rate of two loans including his mortgage on his Connecticut home saving him $17,000 over the life of the loan? This would be the same Senator Dodd that is one of the prime movers of the taxpayer financed mortgage bailout.

Another political link? James A. Johnson, who had been head of presidential candidate Barack Obama's vice presidential search committee resigned abruptly in mid-June after days of intense scrutiny from the news media and political criticism that Johnson, a former chief executive of Fannie Mae, had received mortgages on favorable terms from Countrywide, a central player in the subprime lending crisis. Johnson and Senator Dodd are just two amongst many political players who appear to have received "friend" of Countrywide deals.

Business Week reported on Friday that the SEC has now launched a formal investigation into Countrywide, according to a recent regulatory filing by the Bank of America. The filing does not specify the nature of the inquiry, but notes that the lender has responded to subpoenas issued after an informal inquiry was launched in November 2007 into former Countrywide chairman and CEO Angelo Mozilo's stock trades. Businessweek further quotes an article in the Los Angeles Times that reports "that the SEC probe centers on whether Mozilo's stock trades violated the law and whether the lender's financial disclosures misled investors. . . .The executive exercised options on thousands of shares of common stock through a prearranged trading plan, but the timing of changes in the stock-selling program drew shareholder criticism. The changes, which were made in the months before the company's stock plunged, allowed Mozilo to significantly increase his sales of Countrywide shares."

Connecticut's suit comes right before a court hearing on August 11, in which Businessweek notes that a U.S. Bankruptcy Court judge in Pittsburgh "is set to review an agreement in which Countrywide agreed to pay a bankruptcy trustee $325,000 to settle allegations that the mortgage lender sought improper fees or payments from bankrupt homeowners and otherwise violated bankruptcy court orders and regulations in nearly 300 cases. Countrywide acknowledged errors in handling some debts, but it had denied any systematic effort to thwart bankruptcy protections to collect money. (Update 8-16-08: The bankruptcy judge has declined to allow the settlement to go forward at this time.)
Countrywide is also among the companies being investigated by the FBI as part of the agency's probe into the financial services industry in the wake of the mortgage meltdown."

Finally, the WSJ reports today that the U.S. Justice Department has challenged this deal with the bankruptcy trustee, saying that the lender is trying to silence a critic of the company.

The Countrywide saga offers a heady mix of law and politics, as its CEO Mozilo, has also been identified as just one of the players in what the Wall Street Journal has dubbed the Fannie Mae Gang. Stay tuned.

I will be providing posts on legal developments this week while Walter Olson is on a well-deserved break. I am a Connecticut attorney who practices in the field of commercial litigation and appeals in state and federal courts, with a particular interest in appeals. I also publish on Regulation by Litigation, class actions, legal fees in mass litigation, book reviews and junk science in the courts(link not available, PDF is on request). I also direct, part-time, the Federalist Society Pro Bono Center, and serve on its national litigation section executive committee, co-chair its publications group, and have helped to organize national and local conferences on these and related matters. I also have an ongoing interest in the legal and collegiate academies, the therapeutic state, separation of powers, Supreme Court jurisprudence, and am at work on publications on contingency fees in governmental litigation, the states' attorneys general, and the student loan market. I am a 1984 graduate of Yale Law School, Yale College, B.A. 1977 and clerked for the Hon. Ralph K. Winter on the Second Circuit before entering into private practice. I am happily resigned from a large firm partnership and am pleased to report to the Point of Law lawyer/readers that there is a rewarding professional and writing life in the thereafter.



Rafael Mangual
Project Manager,
Legal Policy

Manhattan Institute


Published by the Manhattan Institute

The Manhattan Insitute's Center for Legal Policy.