The Use of Monitors by State Attorneys General

Thomas Fox

Thomas Fox - Compliance Evangelist

In this white paper, I consider the use of monitors by state Attorneys General (AGs). I am joined by Jerry Coyne, Managing Director of State Monitoring Services at Affiliated Monitors, Inc. (AMI). Initially, we will consider the role of state AGs as enforcers of civil law and in bringing litigation to enforce consumer protect and related statutes.

Part I - The Role of State Attorneys General as Enforcers

Every US state and territory has an AG, whose role is to serve as the chief legal advisor for that state. State AGs are empowered to prosecute violations of state law, represent the state and its employees when sued, and usually to provide legal advice to state agencies and to the state legislature. But its most important and most challenging role may be the right to bring litigation – to file suit – in the name of the state.

States can sue for a number of reasons. For instance, if a company pollutes the state’s air or water, the state AG may file a suit against the polluter. If someone defrauds the state, the state AG may file a suit for damages under the state’s False Claims Act or similar legislation. States receiving federal Medicaid funds each have a Medicaid Fraud Control Unit, which is federally subsidized and almost always housed in the state AGs office. These units investigate and prosecute Medicaid provider fraud, as well as patient abuse or neglect in any Medicaid funded healthcare facility or board and care facility, and frequently file suit in the name of the state to recover damages.

In many states, the AG represents state professional licensing boards, so that any enforcement action against a licensed professional’s right to practice is filed by the attorney general. State AGs also often represent the state’s ratepayers before state public utilities commissions and regulate charitable trusts that have been established to support some public purpose.

Two of the most important powers exercised by most state AGs are the enforcement of antitrust laws and consumer protection laws. Although there is a large body of federal antitrust law enforced by the Department of Justice, nearly every state has its own antitrust statutes. Particularly if a state perceives that the federal government has declined to take an antitrust enforcement action under federal law, a state action can be initiated by the AG for a violation of the state’s antitrust acts.

However, perhaps the most visible, and arguably the most important enforcement authority that a state AG has is to enforce a state’s consumer protection laws. Often, the state AG receives that specific authority by state statute, or by federal law. Most AGs address individual consumer complaints and have a very visible public education role regarding consumer issues. In addition, the AG may file suit in the name of the state in cases involving unfair, misleading, unconscionable, or deceptive acts or practices.

Some actions are brought to enforce one of these areas of the law, many others are brought based upon several different theories. Several areas came together in the mid-1990’s to form the basis of the litigation that more than any other changed the role of the modern state AG, which was litigation brought against the tobacco industry.

Coyne said the state AG world changed when lawsuits brought across the country by numerous states were combined to form a single cause of action against the four largest US tobacco companies: Philip Morris, Inc., R.J. Reynolds Tobacco Company, Brown & Williamson Tobacco Corporation, and Lorillard Tobacco Company. The settlement between these four companies, called the Original Participating Manufacturers (OPM), and the AGs of 46 states was memorialized by the Master Settlement Agreement (MSA).

The states settled their Medicaid lawsuits against the tobacco industry for recovery of their tobacco-related healthcare costs. In exchange, the companies agreed to curtail or cease certain tobacco marketing practices, as well as to pay, in perpetuity, various annual payments to the states to compensate them for some of the medical costs of caring for persons with smoking-related illnesses. The settlement funds were distributed to the states by a complex formula based up the population of Medicaid recipients in each state.

In the MSA, the OPM agreed to pay a minimum of $206 billion over the first 25 years of the agreement. Importantly, the MSA contained no restrictions on how the states could spend those funds. Prior to this time, civil litigation, whether involving public or private parties, was based upon the theory that a victim should be compensated if a defendant’s actions unlawfully caused an injury. That compensation would take the form of compensatory damages and in some cases, punitive damages if warranted to deter specific bad conduct in the future. The hope was that civil litigation would create an economic disincentive to future bad conduct, because the defendant would realize that such bad conduct cost him or her money.

Coyne related that in the case of some corporate defendants, monetary damages did not result in the type of permanent changed behavior that the states hoped for. In order to ensure the future conduct of the original participating manufacturers, the MSA included specific terms restricting the future sales of tobacco products to minors and limiting the types of advertising and promotional materials that the defendants could use. Moreover, the states agreed to diligently enforce the terms of the MSA to ensure that non-settling tobacco companies which were not bound by these restrictive conditions did not obtain an unfair competitive advantage over the settling defendants.

Due to the massive amounts of money flowing to the states, most states took on this responsibility by adding staff not just to their AGs, but to other agencies with tobacco enforcement responsibilities, such as taxation and revenue departments, and state police organizations. The entry of the MSA in 1998 brought unprecedented amounts of new revenue to the states, but also resulted in the states agreeing to take on the responsibility for new and unprecedented enforcement activities to enforce the settlement’s terms, lest the anticipated flow of monies be reduced or even eliminated.

Part II - Reaction to the Big Tobacco Settlement and Criticisms of State Attorneys General

Next, we consider the reaction to the Big Tobacco settlement and criticisms directed at the state AGs. In the immediate aftermath of the tobacco settlement, state AGs basked in the praise of bringing millions and millions of dollars to their states, perhaps even in perpetuity. Among those most appreciative were the nation’s governors and state legislatures, to whom the tobacco settlement represented a new and unexpected source of state revenue. For their part, the state AGs now realized that they had greater power working collectively than individually. This lesson was particularly clear to smaller states, which lacked the resources to sue a national industry on their own. But even the larger states recognized that forcing a defendant to fight against multiple states gave them leverage they had not previously enjoyed.

One of the major criticisms was the use of private lawyers who, having been retained to represent the states, began to collect unprecedented fees, since they had represented the states on contingent fee agreements. In retrospect, the cases were not without risk to the trial lawyers. The costs to litigate would be large, and the tobacco industry had been sued approximately 400 times and had never lost or settled a case. Additionally, despite the well-established injuries caused by smoking, and the apparent merits of a lawsuit, no state AG had the existing resources to take such a challenge on alone.

This led to state AGs around the country to hire private law firms to lead the litigation effort. Some firms represented multiple states, while others represented a single state along with several other firms. The manner in which firms were selected proved controversial and the process was far more transparent in some states than in others. While the percentage of the contingent fee agreement varied from state to state, the settlement of litigation had a single meaning. Based on the size of the settlement, the law firms that had represented the states were in for a payday of historical proportions. In the State of Texas alone the plaintiff’s lawyers were awarded $3.3 billion.

Some state AGs challenged the amount of the fee awards, with very limited success. The law firms had, after all, taken on the costs of the case, and under the terms of the agreements, a large award would inevitably lead to a larger fee. Fueled by criticism of these extraordinary fees, critics charged that the state AGs had abandoned their traditional governmental role to become nothing more than super-powered personal injury lawyers. Sworn by their oaths of office to do justice, critics claimed the state AGs had instead become blinded by their quest for money. The legal argument was that it was unconstitutional for a state AG to give the power of his or her office to a private lawyer whose motive was personal profit. The term activist AG emerged as a label intended to have the same connotation as ambulance chasing lawyer.

Meanwhile, the payments of tobacco money began to flow to the states. As the purposes of these funds were not restricted by the settlement, nearly all states used the money for purposes unrelated to tobacco. To be fair, in the wake of the settlement the number of smokers, and in particular the number of young smokers, dropped to historically low levels. Without question, nearly every state spent at least a portion of their funds on further tobacco reduction and enforcement. But on the whole, the vast amount of monies that flowed to the states were directed to states’ general funds, most often to balance the state budget.

Despite the criticism, the world of the state AGs had changed, perhaps permanently. If the activist state AGs were not checked, the argument went, they would simply look to the next deep-pocketed industry to sue. The targeted industry, whomever it may be, would be left to make a very difficult decision. Could they afford to simultaneously defend litigation brought by multiple states? How many states can an industry afford to fight before the effort becomes unaffordable? If an industry as well funded as the tobacco industry reached a point where settlement as a business decision became inevitable, what about those industries that lack tobacco’s resources? As industries waited for the state AGs to make their next move, many state AGs were consumed with another challenge arising out of the tobacco settlement, and, despite the public attention given to the attorney’s fee issue, this issue was potentially of greater long-term concern.

For all its costs to the defendants, the several hundred-page Master Settlement Agreement (MSA) did not put any of the settling companies out of business. The MSA laid out a complex set of agreements that would define how the tobacco industry would need to conduct itself in the future. So rather than closing, each of the participating manufacturers would emerge to do business in a newly regulated landscape to be sure but would nevertheless still operate. Perhaps most troubling to some was the fact that tobacco’s continued success was necessary to fund the future stream of tobacco revenue to the states under the MSA. Rather than putting the tobacco industry out of business, critics charged, the states and the tobacco industry were now partners with a mutual interest in the tobacco industry’s financial success.

With this potential conflict in mind, the challenge facing the state AGs was how the MSA would be enforced. Under the MSA, the states had agreed to diligently enforce the agreement. Sales by non-participating manufactures had to be particularly scrutinized. Some settlement funds went to the National Association of Attorneys General to start and fund a new project specifically dedicated to tobacco enforcement, but at the state level, every AG was faced with the need to dedicate existing resources to this new responsibility.

If there was going to be more tobacco like lawsuits, the state AGs would need to find a way to enforce the agreement that didn’t involve simply trying to add more employees to accomplish the task.

Part III – Multi-state Litigation in the Post-Tobacco Era

What is the role of state AGs in multi-state 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

A. 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.

B. 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 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.

C. 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.

It 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.

Part IV - The Challenges of Multi-state in Today’s Litigation Environment

What are some of the challenges for state AGs in today’s litigation environment? Of the AGs who participated in the tobacco litigation leading to the MSA in 1998, only one AG, Tom Miller of Iowa, remains in office today. Most of today’s AGs never worked in an AG office before multi-state litigation was simply a fact of life. But although it may seem that multi-state litigation has been around forever, the reality is that it remains quite new, and it should come as no surprise that the processes around multi-state litigation continues to evolve.

The management of multi-state litigation is one of the biggest challenges that AGs face. Anyone who has tried to lead a group will understand some of those challenges. Decision making in a small group may be challenging, but decision making in a relatively large group of states presents different obstacles. One of those obstacles is simply how to weigh the votes of the states. “One state, one vote” may be acceptable to smaller states, but less so to larger ones. Basing votes on states’ population may yield the exact opposite result.

Just as there are differences in the size of states there are differences not only in the size of AGs offices, but in the specific functions assigned to each under state law. In addition, the specific laws giving AGs the jurisdiction to even participate in a particular multi-state action may vary as well. Some offices may be able to assign several attorneys to work full time on a particular multi-state action, while resources and workload may limit the ability of another state to do more than to participate in conference calls or otherwise monitor the status of the litigation.

The states have addressed this issue by forming Executive Committees which lead a multi-state action. Those who participate on the Executive Committee are responsible for most decision making, managing the litigation, including assigning tasks to other participating states not on the Executive Committee, and most significantly, engaging in settlement discussions.

The members of the Executive Committee are normally senior counsel from various bureaus or divisions in an AGs office. AGs and their respective Chief Deputy rarely, if ever, routinely participate in Executive Committee work. There are exceptions to the limited involvement of front office staff, but they are infrequent. It is assumed that the members of the committee are keeping their AGs sufficiently briefed on the multi-state litigation to ensure that major decisions reflect the AGs position.

In the case of a settlement, it is normally the Executive Committee or a group designated by it that negotiates with the defendant’s counsel. Ultimately a proposed settlement will be brought back to the Executive Committee for review and consideration, after which it will generally be put to the participating states. Nearly every settlement involves a combination of monetary damages and injunctive relief.

Until the time of a proposed settlement, there are generally three groups of states in every multi-state action: the Executive Committee of the participating states; those participating states not on the Executive Committee, and the non-participating states. Most frequently, a settling defendant wishes to settle with all states and non-participating states are usually given the opportunity to join in a settlement. As a general rule, however, non-participating states may only obtain injunctive relief, or if allowed to participate in monetary damages, will receive a smaller amount than those states whose participation in the litigation process was more involved.

It is also important to recognize that multi-state litigation, while a major part of every state AGs office, is far from the only litigation that states participate in. States enforce a multitude of statutes, including, for example, environmental laws, professional licensing decisions, securities, and civil rights. State AGs also defend the state when the state or its agents are sued, and nearly every state has at least some criminal jurisdiction. Although only three state AGs have original felony jurisdiction, many others have a role in white collar or other complex litigation. Finally, a state’s Medicaid Fraud Control Unit may be involved in virtually every type of litigation the office engages in, from criminal prosecution of a single defendant for patient abuse or neglect, to a criminal fraud prosecution, to a multi-state civil action.

In the resolution of actions in any of these areas there is a common thread: if the settlement includes specific conditions to control the defendant’s future actions, how will those conditions be enforced?

Part V - The Road Ahead

We conclude by looking at the road ahead and the use of monitors by state AGs. The current state of multi-state litigation may be summed up by acknowledging the extraordinary talents of AG staff in litigating multi-state actions, while recognizing the extraordinary challenge of making sure that the conditions imposed as a part of virtually every settlement are carried out. Fortunately, there is a road ahead that offers a solution to the states at no cost.

In 2012, Coyne was asked to represent the National Association of Attorneys General on a task force being formed by the American Bar Association to update its “Standards for Corporate Monitors.” At the time, most states made little use of corporate monitors. The ABA wanted to ensure that the updated standards would be acceptable to the state AGs, or at least to ensure that no standards would prevent the use of a corporate monitor should a state wish to do so.

The task force met several times over the next two years, and at each meeting Coyne noted “my eyes were opened to the value that a corporate monitor could bring to the work of AGs”. It was clear to Coyne that corporate monitors were used extensively at the federal level, but almost never by the states. In this effort he “also learned about the existence of “Independent Private Sector Inspector Generals” which performed a role similar to, though distinct from, a corporate monitor” and the use of corporate monitors in Foreign Corrupt Practices Act enforcement actions and even to contracting actions.

Usually, a corporate monitor was used as part of a Deferred Prosecution Agreement. This allowed a defendant to remain in operation if certain conditions were met. The reality, however, was that state AGs prosecuted few of the type of cases that most often led to a corporate monitor at the federal level. Yet Coyne believed to limit consideration of the use of monitors to criminal cases overlooked their obvious potential.

While he was on this task force, the Rhode Island state AG’s office had recently resolved two very complex and highly publicized regulatory actions, both of which included the imposition of numerous complex conditions. Though neither action was an enforcement action, and neither of the parties had been involved in any wrongdoing, there remained an extraordinary level of public interest in each action, and the failure of either party to follow a condition would inevitably become a public concern. Coyne realized that the state AG’s office “lacked the long-term capacity to monitor whether the conditions were being followed.” It retained an independent monitor “to present periodic reports of their observations.” Coyne believes this approach “well-served the Rhode Island state AG’s office, since the conditions we had imposed were now being independently verified. But more importantly, the public was well served.”

On a larger scale, Coyne sees that the use of an independent monitor could be brought to multi-state litigation, or to virtually any type of enforcement actions engaged in by a state AG. Further, Coyne believes it is the “independent role of a monitor” which is critical to a monitor’s success. During the settlement negotiation process, the use of a monitor would be incorporated into any settlement proposal and the fees for such a role would be incorporated into the settlement terms. As a true independent, the monitor is not the agent of either party. Rather, the role of the monitor is simply to accurately report the level of compliance by the parties, if non-compliant it is up to the parties to resolve the issue. The monitor takes no side in that dispute. Thus, the use of a monitor does not, in any way, assume the powers or duties of the AG.

It can be fairly stated that if a condition is important enough to be imposed, it is important enough to be followed. The limited resources of state AGs across the nation are not going to be expanded in the foreseeable future and AGs will continue to lack the resources to monitor the conditions imposed at the conclusion of nearly every regulatory or enforcement action, or nearly every piece of litigation.

If multi-state litigation is still in its early stages and continuing to evolve, then the use of corporate monitors is an even newer tool. The use of corporate monitors can enhance the ability of state AGs at no cost to the public and represents a road forward that is in the best interests of the AGs, the courts that approve settlements and other resolutions, and, ultimately, the public.

For more information on Affiliated Monitors, Inc. visit their website here.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Thomas Fox, Compliance Evangelist | Attorney Advertising

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