Settlement sidesteps question of profit-driven prosecution

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One of the world’s largest pharmaceutical companies was slated to challenge South Carolina Attorney General Alan Wilson in the state Supreme Court a few weeks ago. The dispute centered on allegations of overzealous, profit-driven prosecution under the state’s Unfair Trade Practices Act. But the matter vanished from the court’s calendar following a last minute, multimillion-dollar settlement.

Cephalon Inc.’s case against Wilson raised a question that our appellate courts have never answered: Should the attorney general be allowed to hire private lawyers on a contingency fee basis to do the state’s bidding and then take a cut of the firm’s fee after the dust of litigation settles?

Wilson’s office accepted a $6 million settlement from Cephalon just before the high court was set to hear arguments on the morning of Sept. 24. The private lawyers that Wilson retained to go after Cephalon – Janet, Jenner & Suggs in Columbia and Todd Rutherford, a Columbia lawyer and Democratic state representative – walked away with a $1,161,864 fee from the settlement. The AG’s cut for fees amounted to slightly more than $26,000, according to a trial court order that outlined the terms of the agreement.

The fee arrangement in the Cephalon case is based on a contract that Wilson’s office routinely uses to hire private firms to take on pharmaceutical companies accused of violating the state’s Unfair Trade Practices Act by promoting off-label uses for the prescription medications that they produce. The state actions target drug makers that market their products for purposes that have not gained approval from the Food and Drug Administration and typically follow successful federal cases.

Cephalon paid $425 million to resolve federal claims before Wilson and his private attorneys came knocking in 2011.

“Plaintiff’s lawyers seek these cases out,” said James Copland, director of the Manhattan Institute for Policy Research in New York. “They approach the attorney general’s office and essentially get money out of these companies under theories that are extensions of federal regulatory actions.”

$36.5M in AG’s account

Firms that work with Wilson’s office are paid on a sliding scale that decreases as the recovery dollars increase. For instance, if a pharmaceutical company shelled out $5 million to settle a case with the AG the private firm would receive a 25 percent cut. But if the payment totaled more than $100 million, the firm would get 10 percent of the pie. The firm’s fee is further reduced after the AG takes its piece. The state’s portion also follows a sliding scale tied to the recovery amount.

Other state attorneys general retain outside lawyers on a contingency-fee basis, but Wilson appears to be the only AG in the country who is taking a cut from those fees, according to Cephalon’s attorneys at Nexsen Pruet in Greenville. The three-member legal team includes Billy Wilkins, former chief judge of the 4th U.S. Circuit Court of Appeals. He declined to discuss the case.

Cephalon argued in a brief filed with the South Carolina Supreme Court that the AG’s fee agreements, which predate Wilson’s election to the office in 2010 and do not involve a competitive bidding process, create an improper incentive for the state and its private lawyers to prosecute companies for profit.

Cephalon’s attorneys asserted that the agreements tear down the wall that should divide the “private lawyer’s interest in obtaining a fee and the public’s interest in justice” and constituted a violation of due process. They called the contracts an unconstitutional “litigation lottery system” that give the government a stake in the outcome of a quasi-criminal case.

“The attorney general is not neutral,” they wrote. “He cannot be, because his office has a direct financial interest in maximizing the monetary penalties imposed on Cephalon.”

Cephalon also contended that the state’s deals with private firms was a separation of powers violation, because the AG has been depositing his office’s portion of the fees into a so-called “civil litigation account” that he controlled, instead of placing the money in the state’s general fund and letting the Legislature decide how to distribute the dollars.

“Since 2002, $36.5 million has been deposited into this account rather than into the general fund,” Cephalon’s attorneys wrote in the brief. “These funds have been used to pay salaries and fringe benefits, such as retirement and healthcare, for the attorney general’s employees.”

The money, according to Cephalon, also has been used “for a number of other unclear purposes,” including more than $358,000 between 2011-13 for “other professional services” and more than $58,800 in 2013 for “dues and membership fees.”

Lawyers Weekly has filed a public records request seeking all of the AG’s contracts with private attorneys in off-label marketing actions against pharmaceutical companies, along with the total recoveries in those cases. The AG’s office was processing the request at press time.

Each violation of the state’s unfair trade practices law carries a maximum fine of $5,000, which can snowball. In 2011, a trial judge ordered Janssen Pharmaceuticals to pay more than $327 million in penalties for running afoul of the law.

The ruling would have resulted in a $37.4 million fee for the private lawyers involved in the case and about $3.7 million for the AG, according to Cephalon’s attorneys. But the South Carolina Supreme Court subsequently reduced Jansen’s penalties to about $124 million.

‘Examples of shakedowns’

Wilson contended that state law gives him authority to recover attorneys’ fees and said that the contracts in question were proper because he maintained “complete control” over the litigation and that the private lawyers he retained were simply carrying out his orders.

“We’re brought in more as assistants,” said Gerald Jowers, a partner at Janet, Jenner & Suggs who assisted the AG in the action against Cephalon. “The decision-making goes up to the highest level of the attorney general’s office and we’re the ones who put the decision-making into action.”

Prior to Cephalon’s appeal, Richmond County Circuit Judge Thomas Cooper granted Wilson’s motion for summary judgment after determining that the AG’s unfair trade practices enforcement actions were civil, rather than quasi-criminal, and did not violate due process or the separation of powers doctrine.Cooper also concluded in his June 2014 order that Wilson had the authority to “withhold attorneys’ fees from any recovery both for his office and for outside counsel.”

The AG could collect more money for the state if it handled these types of cases in-house, but its fee arrangements shift the risk, expense and burden of taking on a major company from the state to a private firm.

“If they [the AG’s office] are not successful, that’s tax dollars that the attorney general is spending and not recovering,” Jowers said.

The arrangements also have spurred private lawyers to funnel money into the campaign coffers of state attorneys general in exchange for lucrative contingency fee contracts, according to Copland of the Manhattan Institute for Policy Research.

He said that, at the very least, the state is “effectively giving away taxpayer money” by paying private lawyers to handle litigation that almost always results in the pharmaceutical company paying to settle.

“These companies are going to have to spend millions of dollars if they try to defend themselves and that’s money they won’t get back even if they were to win,” he said. “So if you’re going to spend $6 million on your defense, you might as well pay $6 million to settle and walk away.”

“I think in general these are the paradigmatic examples of shakedowns,” he added.

Follow Phillip Bantz on Twitter @SCLWBantz