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Defendants' Memorandum In Response To Plaintiffs' Motion For Partial Summary Judgment 10/3/96
______________________________________________________________________________ IN THE THIRD JUDICIAL DISTRICT COURT OF SALT LAKE COUNTY STATE OF UTAH ______________________________________________________________________________ DEFENDANTS’ MEMORANDUM IN RESPONSE TO PLAINTIFFS’ MOTION FOR PARTIAL SUMMARY JUDGMENT Civil No. 960904948C TABLE OF CONTENTS STATEMENT OF ADDITIONAL UNDISPUTED MATERIAL FACTS The plaintiff Tobacco Companies [ The Plaintiffs Phillip Morris Incorporated, Brown & Williamson Tobacco Corporation, Lorillard Tobacco Company and R.J. Reynolds Tobacco Company are collectively referred to in this memorandum as well as in the State defendants ’ motion to dismiss as the "Tobacco Companies. "] challenge the Attorney General’s authority to file suit against the Tobacco Companies to recover the millions of taxpayer dollars spent on tobacco related illnesses. [ The Plaintiffs ’ complaint in this case is premised on the State ’s "threatened lawsuit " against the Tobacco Companies. That lawsuit is now a reality. On Sept. 30, 1996, the State filed a federal lawsuit against these Plaintiffs and others seeking injunctive relief and money damages. Utah v. R.J. Reynolds Tobacco Co., et al. , No. 2:96CV-0829W (D. Utah) (filed 9/30/96). The fact of the lawsuit does not change the State ’s argument that the Plaintiffs complaint should be dismissed.] In their Motion for Partial Summary Judgment, the Plaintiffs dispute the Attorney General’s authority to retain private counsel on a contingent fee basis so that recovery can be obtained at no cost to the Utah taxpayers. The State has filed a Motion to Dismiss with prejudice the Plaintiffs’ claims that the Attorney General cannot hire counsel on a contingent fee basis. [ The State has moved to dismiss the Plaintiffs ’ complaint in its entirety as improper under the Utah Declaratory Judgment Act. ( See Defs. ’ Mot. to Dismiss & Supp. Mem. filed Aug. 20, 1996.) Defendants further moved to dismiss with prejudice the Plaintiffs first, second and third causes of action challenging the proposed contingent fee agreement for failing to state a claim for which relief can be granted. In that motion and supporting memorandum, which are incorporated herein by reference, the State has set forth the grounds for dismissing these claims with prejudice. ] The State’s motion and supporting memorandum address all of the arguments raised by the Plaintiffs’ in their Motion for Partial Summary Judgment, and the Plaintiffs’ motion should be denied on the grounds set forth in the State’s Motion to Dismiss. Those arguments are not repeated here except in asummary fashion as necessary to clarify the State’s response. Instead, this response memorandum briefly addresses the erroneous assumptions on which the Plaintiffs’ arguments are based and the authorities cited in their memorandum. In addition, although the State’s motion to dismiss the Plaintiffs’ complaint, and specifically the three claims on which the Plaintiffs seek partial summary judgment, can be granted as a matter of law, the State includes in this response undisputed material facts that further support that conclusion. Because the Plaintiffs have moved for partial summary judgment before conducting any discovery in this case and before Defendants have filed an answer, the introduction of material facts is appropriate in response to the Plaintiffs’ motion. Utah Code of Jud. Admin. R. 4-501(2), Utah R. Civ. P. 56(e). STATEMENT OF ADDITIONAL UNDISPUTED MATERIAL FACTS 1. On a regular basis, the State of Utah enters "fixed fee contracts, hourly rate contracts, contingent fee contracts, and combinations thereof" with contractors of various types. (Richins Aff. Ex. A at • 6.) 2. "It is not uncommon for [state] agencies to enter into contracts with vendors with contract terms being of a contingent nature. In such situations, the fees paid per the contingency agreement are considered costs and are deducted from the amount obtained." (Richins Aff. Ex. A at • 8.) 3. "For budget and accounting purposes, [the Division of Finance] will treat recovery in cases handled through a contingent fee contract with outside counsel as follows: Only the net proceeds of the recovery, that is the amount remaining after the payment of costs, expenses and attorney fees contractually due to the law firm, would be deposited with the state General Fund." (Letter from Thorne to Lamb of 9/30/96, Ex. B.) 4. The Attorney General’s Office is aware of six outside counsel contracts that hire counsel on a contingnet fee basis. (Lamb Aff. Ex. C at • 3.) I.The Attorney General Has Constitutional And Statutory Authority to Employ Counsel on a Contingent Fee Basis The Utah Legislature has given the Attorney General far-reaching statutory authority to represent the public interest. Utah Code § 67-5-1(1) (1996) [ Unless otherwise indicated, all references to the Utah Code are to the Utah Code Unannotated (Michie 1996), current through the 1996 Second Special Session.] (attorney general shall "take charge, as attorney, of all civil legal matters in which the state is interested"). The Legislature has further granted the Attorney General the exclusive authority to hire outside counsel for the State and the executive branch agencies. Id. at § 67-5-5 ("the attorney general alone shall have the sole right to hire legal counsel for each such agency"). Contingent fee contracts have been approved in the Utah Administrative Rules. Utah Admin. R. 105-1-6. Finally, the Attorney General has common-law authority to bring an action against the Tobacco Companiesto protect the public interest. Hansen v. Barlow, 456 P.2d 177, 179 (Utah 1969); (see Defs.’ Mem. Supp. Mot. to Dismiss at 9-23.) The Plaintiffs maintain that the Attorney General’s statutory authority to retain outside counsel does not include the authority to enter into a contingent fee agreement. The Plaintiffs assert three related reasons for this conclusion. First, citing State v. Jiminez, 588 P.2d 707, 709 (Utah 1978), the Plaintiffs initially argue that the Attorney General’s common law powers are narrowly construed. Second, they claim that the Attorney General must have express statutory authority to enter into a contingent fee contract as opposed to any other contract. Finally, the Plaintiffs argue that a contingent fee contract conflicts with statutory law. None of these assertions are correct. The Attorney General’s common law powers have been broadly construed by the Utah Supreme Court. In Jiminez, the case on which the Plaintiffs rely, the defendant argued that the Attorney General did not have the authority to prosecute him for theft by deception and that, by statute, only the county attorney had the authority to prosecute criminal actions on behalf of the State. The Utah Supreme Court disagreed. Affirming its position in Hansen v. Barlow, the Utah Supreme Court recognized the Attorney General is "clothed with all the power and duties pertaining thereto at common law . . . in the absence of express legislative restriction to the contrary . . . ." Jiminez, 588 P.2d at 709 (citing Hansen, 23 Utah 2d 47, 456 P.2d 177 (1969), quoting Darling Apartment Co. v. Springer, 22 A.2d 397, 403(Del. 1941) (emphasis added)). Thus the common law authority of the Attorney General to exercise "all such power and authority as the public interest may from time to time require" remains intact unless there is a an "express legislative restriction to the contrary." Jiminez, 588 P.2d at 709. In Jiminez, even though a statute gave prosecuting authority to county attorneys, that statute did not conflict with, or otherwise restrict, the Attorney General’s authority to prosecute a criminal case. Similarly here, there is no express legislative act restricting the Attorney General’s authority to enter into a contingent fee contract. The statute granting exclusive authority to the Attorney General to hire outside counsel is silent with respect to the terms on which counsel may be hired. The Plaintiffs persist, however, by arguing that absent a statute specifically authorizing a contingent fee agreement or a case recognizing the Attorney General’s common law authority to enter such an arrangement, it cannot be done. The absence of either an express statute or a case on point, however, proves nothing. Indeed, the Plaintiffs ask the wrong question. The question is not whether a statute grants specific authority to enter into a contingent fee agreement, but rather whether there is a statute which expressly prohibits contingent fee agreements. The answer to that question is no. The Legislature has expressly given the Attorney General the power to hire outside counsel. The Legislature is not required to specifically authorize this agreement with outside counsel any more than it must authorize any agreement that the Attorney General enters with outside counsel or any other independentcontractor. The decision to seek the assistance of outside counsel on any particular case and the terms of any specific engagement have been properly left to the Attorney General’s discretion, consistent with the applicable Administrative Rule. [ Although the State is not proceeding under this provision, it is interesting to note that the Legislature specifically contemplated the State paying a contingent fee when it intervenes in an action to recover medical costs brought by a recipient of State medical assistance payments. Utah Code § 26- 19-7 ( "The Department may not pay more than 33% of its total recovery for attorney ’s fees . . . ").] The absence of case law is equally unpersuasive. The fact that the Supreme Court has not held that the Attorney General has the authority to hire counsel on a contingent fee basis means nothing more that the question has never been presented. The Plaintiffs cite no case, Utah or otherwise, in which the Court has ruled that such an agreement is precluded by common law. [ Plaintiffs cite First Equity Corp. v. Utah State Univ. , 544 P.2d 887 (Utah 1975) for the proposition that the Attorney General cannot usurp the legislature ’s authority to disburse unappropriated public funds to special outside counsel. Pls. ’ Mem. Supp. Mot. S.J. at 13. In First Equity , the Utah Supreme Court held that the university did not have the power to invest funds in securities outside those declared lawful by statute. First Equity, and the cases it relies on, concerns investments of funds in the control of the public entity when the legislature had specifically dictated the terms on which the funds could be invested. These cases cannot be analogized to the situation here and shed no light on the Plaintiffs ’ claim that the Attorney General is usurping legislative authority. Unlike the case of investments of public funds, the Legislature has given the Attorney General the unfettered authority to hire private counsel and has not dictated the terms of payment that she must use in those contracts.] In a futile effort to find a conflicting statute, the plaintiffs argue that section 67-5-5, which requires the Attorney General to pay for the costs of outside counsel, prohibits a contingent fee agreement. This section applies, however, only if payment of state monies isrequired. Nothing in the language of that section precludes private attorneys from providing services to the State on either a pro bono basis or with payment contingent on, and to be paid out of, the funds recovered. Indeed the Attorney General, and other agencies, regularly use contingent fee contracts. (Richins Aff. Ex. A at • 8.) The Attorney General Opinion Plaintiffs rely on also does not support their position. The Attorney General’s Informal Opinion 79-373 simply states that "if the Attorney General hires outside counsel, the statute states that [she] shall be responsible for remuneration." Utah Att’y Gen. Inf. Op. No. 79-373 (Nov. 4, 1980) (attached as Ex. E. to Pls.’ Mem. Supp. S.J.) The question in that Opinion was whether attorneys hired by the Attorney General to represent the Industrial Commission were to be paid out of the Attorney General’s budget or the Second Injury Fund. Citing Utah Code section 67-5-3 (1980), the predecessor to the current section 67-5-5, the Opinion concluded that the proceeds from Industrial Commission’s Second Injury Fund could be used to pay a staff employee who might be appointed as a special assistant to the Attorney General. [ The Attorney General ’s Informal Opinion notes that there was a lawsuit pending in District Court regarding the authority of the Attorney General to appoint lawyers for State officers and State agencies, and the opinion was given unofficially. The case referred to is Hansen v. Utah State Retirement Board, and Utah State Retirement Fund; Utah State Industrial Commission and Utah State Insurance Fund, et al. In that case, the Attorney General filed suit seeking a judgment declaring that the Utah Constitution gave the Attorney General the exclusive authority to act as legal advisor to the state defendants. The Third District court granted defendants ’ motion for summary judgment. The Utah Supreme Court affirmed, holding that the defendant agencies were not executive department agencies and that the Attorney General did not have exclusive authority to act as their legal advisor. The Court, however, did conclude that the Attorney General had the exclusive authority to represent executive department officers. 652 P.2d 1332, 1337 (Utah 1982). ] However, this issue, and the answer given, have no relevance to thePlaintiffs’ argument here. In summary, the State’s litigation against the Tobacco Companies is in the public interest, and the Attorney General has the authority to bring claims on behalf of the State against the Tobacco Companies. The Attorney General also has the express authority to hire outside counsel and the applicable rules contemplate contingent fee agreements. There is no contrary statute to which this broad grant of authority must yield. II.The Terms of an Agreement With Outside Counsel Is an Executive Decision of The Attorney General And The Decision to Enter Into a Contingent Fee Agreement Does Not Violate Utah’s Budgetary And Appropriation Law The Plaintiffs erroneously assert that the contingent fee arrangement violates Utah’s budgetary and appropriation laws. The Utah Procurement Code provides that "any type of contract which will promote the best interests of the state may be used." Utah Code § 63-56-29(1) (1996). [ Section 63-56-29 specifically prohibits a cost-plus-a-percentage-of-cost contract and limits the use of a cost-reimbursement contract. With those exceptions, any other type of contract may be used.] The types of contracts used on a regular basis by the State of Utah include "payment terms involving fixed fees, hourly rates, cost plus contracts, contingent fee contracts and combinations thereof . . ." (Richins Aff. Ex. A at • 6.) Furthermore, contracts which produce revenue often provide for the payment of fees as a cost of the contract on a percentage or contingency basis. (Id. at • 8.) Consistent with this practice, the Attorney General’s Office has previously retained private lawyers on a contingent fee basis. (Lamb Aff. Ex. C at • 3.) Moreover, the Division of Finance has agreed that, in a contingent fee case, only the net proceeds of the recovery must be deposited in the General Fund. (Letter from Thorne to Lamb of 9/30/96, Ex. B.) The authorities Plaintiffs rely on do not contradict this accepted practice. First, the Plaintiffs argue that "any recovery in the Threatened Lawsuit would constitute public funds." (Pls.’ Mem. Supp. S.J. at 14.) In reaching this conclusion, the Plaintiffs cite section 51-7-3(18) of the State Money Management Act, which broadly defines "public funds" as "monies, funds and accounts, regardless of the source from which the monies, funds, and accounts are derived, that are owned, held or administered by the state . . ." Utah Code § 51-7-3(18) (emphasis added). The anticipated recovery here, however, does not fall within this definition. The alleged public funds the Plaintiffs refer to don’t exist -- there has been no recovery. No payment from any existing source of funds, other than the Plaintiffs own monies, is anticipated. The proposed contingent fee contract cannot be invalidated today for attempting to "appropriate" funds from the Plaintiffs. And nothing in the proposed contract requires the Attorney General to pay any monies out of funds "owned, held or administered bythe State -- it requires only that the attorneys be paid if, and when, there is a recovery from the Plaintiffs. If the State is successful in its action against the Tobacco Companies, both the client (the State) and the law firm will have an identifiable interest in the proceeds of the lawsuit. The only portion of the proceeds that will "belong" to the State will be the net proceeds of the recovery. As with other contingent fee arrangements in which State agencies engage, the fees will be deducted as reimbursable expenses before deposit with the State. (Richins Aff. Ex. A. at • 8; Letter from Thorne to Lamb, Ex. B.) Only the remainder, or the amount due the State, will come into the Attorney General’s possession. See Utah Code § 67-5-1(4) (requiring the Attorney General to "account for, and pay over to the proper officer, all moneys which come into [her] possession, that belong to the state") (emphasis added). [ The Plaintiffs also cite Allen v. Rampton , 463 P.2d 7 (Utah 1969) for the proposition that the State treasurer is the sole custodian of public funds. " Pls. Mem. Supp. Mot. S.J. at 15. The Defendants do not dispute that statement. In Allen , the Supreme Court held that the division of investments created by the State Money Management Act was unconstitutional because it interfered with the constitutional powers and duties of the State Treasurer. In so holding, the Court adopted the rule that "the Legislature, in absence of special authorization in the Constitution, is without power to abolish a constitutional office or to change, alter, or modify its constitutional powers and functions. " Id. at 9 (citations omitted). The Court further reasoned that the Act in question took from the treasurer those duties which had belonged to his office since statehood and before. In so stating, the Court recognized the importance of not interfering with the duties of an elected official. Id. at 13. So too here, the Attorney General is elected to "take charge, as attorney, of all civil legal matters in which the state is interested. " Utah Code § 67-5-1(1). Under the common law, she has the ability to exercise all such power and authority as the public interest may require. See supra at p. 4. Allen , supports the argument that the Legislature cannot interfere with the Attorney General ’s ability take charge of all civil matters by dictating the terms of each contract for outside counsel she may deem necessary to perform her duties.] Consistent with how contingent fees operate in practice, courts have generally upheld contingent fee contracts in which the government is a party, rejecting the argument that such an agreement is an unlawful appropriation of funds. Gonzales v. Personal Collection Services, 494 P.2d 201 (Wyo. 1972); State v. Musgrave, 370 P.2d 779 (Idaho 1962); Bourne v. Cole, 77 P.2d 617, 620 (Wyo. 1938); Board of County Comm’r.s of Washington County v. Clapp, 86 N.W. 775 (Min.. 1901). (See Defs.’ Mem. Supp. M. to Dismiss at 16-19.) In upholding such contracts, courts have reasoned the appropriation rules could not apply to funds which are not in existence, i.e. to potential recoveries. Thus, even the Legislature could not appropriate funds, as the Plaintiffs suggest that they should, because no funds exist. [ The cases and Attorney General opinions cited by the Plaintiffs do not support a contrary conclusion. The Attorney General Opinions simply state the general rule that money cannot be paid from the Treasury absent a legislative appropriation. Those Opinions don ’t address the question here -- whether the gross proceeds of recovery in this case must be deposited in the Treasury in the first instance. Lingo-Leeper Lumber Co. v. Carter , 17, P.2d 365 (Okla. 1932), cited by the Plaintiffs for the same proposition, is also inapposite. In Lingo-Leeper , the Legislature had appropriated funds for temporary, mobile correctional facilities. The state agency, however, entered into a contract with the plaintiff to built a permanent prison. Because there was no appropriation for the prison, the Court refused to enforce the contract. ] In conclusion, no legislative action is required for the Attorney General to enter a contract for outside counsel to represent the State -- the Legislature has already given her the exclusive authority to do so. Moreover, the Attorney General, like other officials with the authority to enter contracts on behalf of the State, may enter "any type of contract which will promote the best interest of the State." Utah Code § 63-56-29. Given the limited resources ofthe Attorney General’s office to pay for outside counsel and the complexity and financial burden of any action against the Tobacco Companies, compensating counsel through the proposed contingent fee agreement may be the only way that this action can proceed. Clearly it is in the best interests of the people of Utah to recover the millions of dollars that Utah taxpayers have paid in caring for Utah citizens afflicted with the serious diseases caused by the Plaintiffs’ tobacco products. Bringing a lawsuit against the Tobacco Companies without the expenditure of additional public funds further promotes the public interest. III.The Public Officers’ And Employees’ Ethics Act Does Not Prohibit Private Counsel Retained by The Attorney General From Providing Services on a Contingent Fee Basis The Utah Public Officers’ and Employees’ Act prohibits a public employee from accepting "any gift, compensation, or loan for himself or another" if "it tends to influence him in the discharge of his official duties." Utah Code § 67-16-5(1)(a). There is no basis for the Plaintiffs’ argument that a contingent fee agreement would improperly influence counsel in the discharge of his or her professional and ethical duties under the contract. If that were the case, lawyers should not be permitted to enter into contingent fee agreements with any client, public or private. The Code of Professional Conduct governing lawyers specifically allows lawyers to provide services on a contingent fee basis and there is no ethical rule or statutory provision to the contrary for lawyers hired by the Attorney General. The Utah Public Officers’ and Employees Ethics Act prohibits specific conduct, none of which exist or is alleged here. First, the Act limits an officer’s or employee’s outside employment and activities. Specifically, under the Act, an officer or employee (a) cannot accept employment or engage in activities that might require the employee to disclose controlled information gained by reason of his or her official position, § 67-161-4(1); (b) cannot use controlled information for his or another’s private gain, § 67-16-4(2); and (c) cannot use his or her position to secure special privileges, § 67-16-4(3). The Act also prohibits the acceptance of employment or engaging in an activity that would impair the employee’s independence of judgment or interfere with the ethical performance of employee’s public duties. § 67-16-4(4-5). These ethical standards are no different from the ones already imposed on lawyers under the Code of Professional Responsibility. There is no conflict between these ethical standards and providing services to the State on a contingent fee basis. The Act also prohibits the acceptance of gifts, loans or compensation under certain circumstances. Again, there are no gifts or loans being accepted by private counsel in this instance, and the Plaintiffs cannot identify any terms of the proposed contract that conflict with this provision. The Act also requires disclosure of interests in regulated businesses and prohibits officers or employees from participating in transactions involving business in which they have an interest. Again, none of these circumstances apply to private counsel here. Citing Utah Public Employees Ass’n v. State, 610 P.2d 1272 (Utah 1980), the Plaintiffsargue that the contingent fee creates a potential conflict or appearance of conflict of interest between counsel’s "public duties" and "private interests" and is thus improper. In Utah Public Employees, the Utah Supreme Court upheld the Governor’s policy that employees of the Division of Wildlife Resources could not participate in drawings for hunting permits. The employees had contended that the Governor’s policy was unconstitutional under the equal protection clause. Although the Court referred to the Ethics Act in dicta, it did not find that employees participation in the drawing violated the Act. To the contrary, the Court noted that there was "no evidence of impropriety." Id. at 1274. The Court rejected the constitutional claims of the employees and held that the Governor had the prerogative to adopt a policy that would avoid the appearance of conflict on the part of his employees. No such policy was required by the Ethics Act; it simply was within the Governor’s discretion to adopt one. Utah Public Employees is irrelevant here. Finally, the Plaintiffs argue that "special counsel’s overriding incentive is not to do justice, but to prevail on the damages claims by judgment or settlement." (Pls.’ Mem. Supp. S.J. at 23.) If the Attorney General determines that it is in the public interest to seek to recover the million of dollars expended by the State to provide medical care to treat illnesses caused by the Plaintiffs’ products and retains outside counsel to pursue those claims against the Tobacco Companies then, a fortiori, prevailing on those claims would provide justice to Utah’s citizens. Certainly the Attorney General hopes that counsel aggressively pursues thatgoal. The fact that counsel will also benefit from a recovery does not conflict with counsel’s duties to the Attorney General or the citizens of the State of Utah. As the Maryland Court noted, "private counsel’s financial stake in the outcome might be consonant with the State’s obligation that justice be done." Phillip Morris, Inc. v. Glendening, slip op. at 31, 32 (Ex. A to Def.’s Mem. Supp. M. to Dismiss). Utah constitutional and statutory law clearly permit the Attorney General to hire outside counsel on a contingent fee basis and, indeed, it is good public policy to do so in this case because it will avoid excessive taxpayer expense. For these reasons, and as more fully set forth in Defendants’ Memorandum in Support of Defendants’ Motion to Dismiss, the Court should deny the Plaintiffs’ Motion for Partial Summary Judgment and Grant the Defendants’ Motion to Dismiss the Plaintiffs first, second and third claims with prejudice.
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