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The Shakedown State

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The Shakedown State

July 22, 2003
Legal ReformOther

From news reports of late, you might think California's legal establishment was working hard to prevent a repetition of the state's recent "shakedown-lawsuit" scandal. On July 10, following a massive state bar investigation, three principals of the Beverly Hills-based Trevor Law Group decided not to fight disbarment on charges they'd wrongfully sent demand letters to thousands of small businesses offering not to sue them in exchange for "settlements" amounting to thousands of dollars apiece. And two days earlier state attorney general Bill Lockyer filed charges against a second law firm engaged in what he called a "quick-buck racket": Brar & Gamulin had mass-mailed lawsuit threats to hundreds of ethnic grocery stores and nail salons. Mr. Lockyer's office is probing three other law firms as well for questionable suits under the state's sweeping consumer-rights law, also known as Business and Professions Code 17200.

So the system's finally working the way it ought to, right? If you think so, you may have missed the latest from the state legislature in Sacramento, whose Democratic leadership is using the shakedown scandal as an excuse to rush to passage a bill devised by the state's trial lawyers' association which would actually expand the law in question so as to give lawyers more leverage to extract settlement money on dubious 17200 claims.

Shakedown suits are nothing new in the Golden State, but Damian Trevor and two colleagues effectively mechanized the process. They combed through state regulatory records for businesses that had been issued some kind of reprimand, often over trivial paperwork omissions or missed deadlines. They sent letters in the name of Consumer Enforcement Watch, a newly organized group whose mailing address was the same as theirs, offering not to sue the businesses if they came across with checks in the thousands of dollars. The firm's "red letter," named after the color of the paper on which it was printed, put matters bluntly: "Either pay even more money to fight in court or settle out of court and get on with business." Many did pay.

In part because of press sympathy for mom-and-pop immigrant defendants, a furor began to build. And while trial-lawyer spokesmen took a "few bad apples" line, business groups saw Mr. Trevor's treasure hunt as merely the latest logical extension of section 17200, a law so bizarrely pro-plaintiff as to be a major disincentive for many companies to do business in the state. Indeed, the chairman and CEO of mortgage giant Countrywide pointedly cited 17200 in a recent letter to Gov. Gray Davis explaining the company's decision to halt expansion in California.

How pro-plaintiff is section 17200? As in the case of Nike v. Kasky, recently looked at (but then passed over) by the Supreme Court, it lets lawyers run to court without any injured client at all to sue against business practices that are either "unfair" -- a peerlessly amorphous term -- or "illegal," a category that takes in countless technical violations that actual regulators and prosecutors have already settled or view as too trivial to pursue. Lawyers can file valid 17200 suits that piggyback on a business's claimed violation of entirely unrelated laws, even if those unrelated laws make clear that private parties can't sue to enforce their provisions. If the law were a prop in Alice in Wonderland, it would carry a little tag saying, "Abuse Me."

The Trevor lawyers went further than most of their brethren in some key respects, notably in pursuing claims without even cursory investigation and in misleading their targets during settlement discussions. Yet in other tactics that roused public ire, such as use of a bogus consumer group, they merely followed the crowd. John Sullivan of the pro-reform Civil Justice Association of California, who keeps a list of 17200 horror stories, says he's counted something like two dozen ad hoc consumer groups that exist as lawyer-controlled fronts. Identical practices are seen in the parallel bounty-hunting subculture spawned by the state's Proposition 65 law, under which lawyers have sued manufacturers for failing to warn of the claimed toxic emissions given off by brass darts, Christmas lights, hammers, mineral oil, billiard cue chalk, and picture frames, not to mention French fries and chocolate (which are among many foods in which traces of cancer-causing substances naturally occur). One lawyer filed 400 Prop. 65 claims against candle makers, on the grounds that their products emit toxic fumes when burned; the consumer group he represented turned out to have his mother as its only officer.

Robert Fellmeth, a University of San Diego law professor with strong liberal and consumerist credentials, supports 17200's broad objectives but has said that its current configuration "really creates an environment for extortion." This spring Mr. Fellmeth worked with Assemblyman Lou Correa (D., Anaheim) to craft a very modest measure that would have required court approval of settlements and provided public hearings to vent defendant objections. They might have saved themselves the effort: In May the Judiciary Democrats deep-sixed Mr. Correa's bill along with more far-reaching GOP alternatives that in one instance would even (of all things!) have required lawyers to line up actual injured clients before they sued.

But that was just a prelude to what happened next. On July 8 the respective Judiciary chairs stunned business observers by pulling from a hat and passing substitute bills devised by the state's trial lawyer group, which styles itself Consumer Attorneys of California. Section 122, sponsored by Sen. Martha Escutia (D., Whittier), with its companion Assembly bill, would impose essentially superficial curbs on abuse. Most significant, judges would for the first time review fees (as opposed to settlements in general) but would be instructed to approve any and all fees if "consistent with applicable law." Lawyers would have to send a copy of each lawsuit to the state bar, and would have to include new boilerplate in their demand letters advising defendants of their right to consult their own attorney and so forth.

After that begins a trial-lawyer wish list, starting with liberal rules for "joinder" of defendants, along with explicit authority for lawyers to sue multiple businesses without knowing which ones have actually committed a violation. Most ominous of all, the bill would overturn a March decision in which the state supreme court barred lawyers from demanding the "disgorgement" under 17200 of any and all revenue a business had earned while an infraction was in progress, as opposed to restitution for customers affected by a practice, which they are still free to seek. The difference between the two is dramatic: If you're a pizzeria owner and get sued for unfairly claiming that your pie is the best in town, restitution might consist of giving away consolatory baskets of garlic bread, but disgorgement could mean paying out all the revenue you've taken in while the slogan was printed on your boxes. It's a remedy so drastic that courts seldom impose it; its real function is usually to give lawyers the leverage to terrify defendants into settlement. To top it all, the Escutia bill would allow lawyers to steer settlement funds not paid to actual consumers to organizations that "promote justice," code for the consumer and pro-litigation groups with which the lawyers are allied.

The trial lawyers' bill has now passed both houses in different forms and could reach final-action votes any day now. Don't count on Democratic Gov. Gray Davis to exercise his veto: trial lawyers are likely to be major sources of the war chest he'll need for his forthcoming recall battle. Thus do the trial lawyers turn even their own scandals to tactical advantage. Is it any wonder they're the most successful special-interest lobby in the land?