The Work

December 1, 2008 9:00 AM

The Am Law Litigation Daily: December 1, 2008

Posted by Ed Shanahan

Edited by Ben Hallman

Update: Due to flooding at the Broward County Courthouse, opening arguments in Hess v. RJ Reynolds have been delayed.

'Son of Engle' Trial Begins Today in Miami

What would have been the biggest class action verdict in U.S. history didn't stand for long. In 2000, a Florida state court jury awarded $146 billion to a class of 700,000 smokers who had brought suit against a group of tobacco companies in a case called Engle v. Liggett. Six years later, the Florida Supreme Court decertified the class and tossed the verdict (the ruling is available here, via Altria). But the case didn't go away. The Florida high court ruled that former class members could file individual claims against the tobacco companies without having to prove what was already established in the class action: that cigarette smoking is dangerous, that tobacco companies knew that smoking was dangerous, and that tobacco companies knowingly misled the public about the dangers of smoking.

Eight thousand "Son of Engle" cases were filed in the wake of the state supreme court's ruling. Opening arguments begin today in Broward County in the first of them to go to trial. The plaintiff, Elaine Hess, lost her husband, Stuart, to cancer in 1998. Stuart Hess smoked two to three packs of cigarettes a day, mostly Phillip Morris brands, from the age of 13 until he was diagnosed with lung cancer in 1996.

According to the Daily Business Review, Broward county judge Jeffrey Streitfeld has scheduled a three-phase trial. In the first phase, the jury will determine whether Stuart Hess would have been a part of the Engle class--that he was addicted to smoking and that cigarettes caused his death. Only if the jury rules that he meets those criteria will Elaine Hess be permitted to present the findings from the Engle case and ask for damages. But the question of what evidence will be permitted during the first phase still isn't settled. In an earlier hearing, plaintiff's lawyers Gary Paige and Adam Trop of Paige Trop & Ameen said they wanted to show that Philip Morris hid evidence of nicotine's addictive qualities and smoking's dangers. Philip Morris, represented by Kenneth Reilly at Shook Hardy & Bacon, argued that this evidence didn't belong in the first phase of the trial because it suggested intent.

About half of the 8,000 Son of Engle cases were filed in federal court, and those have hit a roadblock. In August, a Jacksonville federal judge tossed out the Engle findings, ruling that they deprived the tobacco industry of due process. That issue is pending before the U.S. Court of Appeals for the Eleventh Circuit.

Courtroom Live will be airing the entire Hess trial for subscribers. The site is also offering free video clips of opening arguments to Litigation Daily readers beginning tomorrow. Check Courtroom Live's homepage for details.

In Good Times and Bad, Defense Lawyers for Indemnified Corporate Criminals Get Paid

With blue-chip clients disappearing faster than leftover stuffing after Thanksgiving, who isn't worried these days? Even managing partners, according to The American Lawyer's just-published survey of law firm leaders, are for the first time in more than a half-decade expressing a distinct lack of optimism about the future.

But fear not, white-collar litigators! Because elsewhere in the December issue of The American Lawyer, Susan Beck explains why companies that provided legal indemnification for their executives usually have to keep paying their lawyers' bills, even after the execs are convicted. Writes Beck: "There's one thing the defense lawyers for Richard Fuld of Lehman Brothers and Martin Sullivan [of AIG] and their brethren won't have to fret about: getting paid."

Beck discusses several cases familiar to Litigation Daily readers--Wilmer Cutler Pickering Hale and Dorr's fight with McAfee  over Prabhat Goyal's legal fees (second item); Skadden's suit to force Brocade to pay Gregory Reyes's bills (third item); and Hollinger's failed attempt to wriggle out of the defense tab for Conrad Black and two other convicted executives (fourth item). In each instance, Beck explains, the corporations were ordered to keep paying lawyers' bills.

Like most other companies, they had offered corporate indemnification policies so generous that there was "no mechanism to keep the executives' legal fees under control," Beck writes. "The defendant, who is not paying the fees out of his pocket, wants his lawyers to spare no expense.The company, which is paying the fees, has no say or control over the defense team."

Will the white-collar defense boondoggle continue through the round of prosecutions that is widely expected to result from the current financial crisis? Beck predicts it will (although she notes that insurers have been dropping coverage for indemnification provisions). And she says the companies paying the bills have only themselves to blame for how much they'll be shelling out. "It's hard to feel sorry for any of these companies," Beck writes. "After all, they wrote the bylaws and the employment contracts. This is yet another problem of their making."

Legal Times Reporter Just Back From Afghanistan: Rule of Law Is a Distant Hope

We try to stick to our litigation-only mandate, but we make an exception when a reporter for one of our sibling publications is ordered out of her vehicle at gunpoint.

Marisa McQuilken, a Legal Times reporter, was embedded with a team of lawyers on a fact-finding mission in Afghanistan when her convoy was stopped at a checkpoint. Ignoring the Blackwater agent who was brandishing his credentials, the guards told McQuilken and the other passengers to get out of the car. Leaving your vehicle is not, apparently, something you want to do in a war zone, so the Blackwater guard refused, prompting an armed confrontation. "For a girl born and raised in what I like to call 'the Seattle Bubble,' this was a lot of guns," McQuilken writes in her reporter's notebook, one part of an impressive collection of stories McQuilken wrote about the efforts of private law firms, public officials, and Afghan lawyers to build a justice system in a country that is more Balkanized, according to one of her sources, than the Balkans. (There's video, too, here and here.)

McQuilken toured Kabul with a delegation representing the Public-Private Partnership for Justice Reform in Afghanistan, an organization formed a year ago with the aim of bringing Afghan practitioners into the larger international legal community with the help, and money, of U.S. lawyers and law firms. But that promise seems as distant now as it did last December. As its first act, the group brought 16 Afghan prosecutors to train at a Utah law school. The intention was noble; the execution, it seems, not good. The American lawyers and professors who volunteered as teachers weren't trained, and they hadn't translated the teaching material into the languages spoken by the Afghans.

The group has also faced institutional resistance from the United States Agency for International Development's much-larger rule of law program in Afghanistan, which claims to have trained 800 of the country's 1,400 judges since 2004. McQuilken describes a meeting between the delegation and James Agee, who heads the USAID program; the delegation, she writes, seemed like "a group of teenagers trying to explain themselves to a displeased vice principal."

The lawyers on the trip, McQuilken says, aren't oblivious to the challenges. The next big initiative planned by the group is a scholarship program that would send Afghan lawyers to top law schools. Peter Garvin, a Jones Day partner, told McQuilken after their trip that too much emphasis had been placed on signing law schools up for the program, and too little to providing Afghan lawyers with  fundamental legal training.

The incremental approach is a lesson that it seems to have taken government officials longer to learn. McQuilken describes the seven years since the Taliban government was overthrown in not-too-flattering terms. "The patchwork of rule-of-law programs established since the U.S.-led invasion in 2001 has made only incremental progress in establishing a stable, nationwide system of justice," she concludes. Here's hoping they have more success in the next seven years.

Are Investment Tips Protected Speech? SEC Says No Way

Listen up, Litigation Daily readers! You can't afford to pass up this offer! For a mere $1,000 subscription, we will provide you with can't-miss predictions of the outcomes of important securities lawsuits. You can then use that information to trade on the stocks of the companies involved. Invest your entire portfolio. You will become billionaires, just like us!

You've probably guessed that we're not serious (we figured the "just like us" part was a giveaway). But a similar come-on prompted a 2003 Securities and Exchange Commission fraud complaint against the publisher of Pirate Investor, a short-lived Internet newsletter that promised inside tips to subscribers willing to pony up $1,000. Last year Baltimore federal district court judge Marvin Garbis ruled that Pirate Investor and its founder, Frank Porter Stansberry, were guilty of fraud and ordered the company to pay a $1.3 million fine. Tomorrow the U.S. Court of Appeals for the Fourth Circuit will hear Pirate's appeal, in which Baker & Hostetler partners Bruce Sanford and Bruce Brown are expected to argue that the defendants are protected by the First Amendment.

The backstory: In May 2002, Stansberry sent out an e-mail to subscribers promising quick profits based on inside information. (The heading said, "Double your money on May 22nd on this super insider tip.") The e-mail claimed that analysts at Pirate Investor had learned of a deal that a small company was about to make, which would result in $2.5 billion in profits. The e-mail encouraged investors to stake their entire investment portfolios on the company. And it offered them a full report on the investment opportunity for $1,000.

Trading volume and the share price of the company Pirate was touting--a nuclear energy business called USEC--surged after the report was sent out. But the deal Pirate claimed to have insider information of never happened.

The issue at last year's trial was whether Pirate's newsletter was constitutionally protected, just as a Money magazine article suggesting investments would be. The SEC argued that the newsletter was not like an article analyzing corporate stock value because it claimed to offer "inside information about a specific deal." But Baker partner Bruce Brown pointed out to us that news organizations report inside tips all the time. He argues that what Pirate Investor did--reporting information obtained from a USEC source--was no different.

We caught up with Cleary Gottlieb Steen & Hamilton partner David Becker, a former general counsel at the SEC, who called the case a "real brainteaser," and a "case about drawing lines." On one hand, he said, the court could view this as a straightforward fraud case: Pirate Investor earned more than $1 million by selling false information. Yet in his analysis, the SEC will have a hard time explaining how First Amendment protection doesn't attach to Pirate's newsletter.

Dream Job: Wine Industry Lawyer Moonlights as California Grape Grower (Or Is It the Other Way Around?)

The Litigation Daily has a sophisticated palate for wine lawyers. In August we told you about Indianans James Tanford and Robert Epstein, who are involved in the apparently incessant debate over Internet wine sales (fifth item). Today, allow us to introduce you to another wine litigator: Tracy Genesen, a partner at Kirkland & Ellis in San Francisco.

Genesen made news in the wine industry recently by representing Family Winemakers of California, a leading trade group, in a Massachusetts federal district court direct-shipping case. In late November the court granted the trade group's motion for summary judgment, ruling that the state could not enforce a law that banned winemakers producing more than 30,000 gallons a year--not much, by winery standards--from shipping directly to Massachusetts customers. (Judge Rya Zobel's ruling is available here, via the Family Winemaker's site.) Smaller winemakers, which not coincidentally included all Massachusetts vineyards, faced no such restrictions.

We reached Genesen by phone on the day before Thanksgiving in Madison, Wis., where she was visiting family and friends. She told us that Family Winemakers wanted her to pursue the Massachusetts case because similar "capacity cap" laws are popping up across the country--Ohio, Arizona, Kentucky, and Maine are among the states that have them--with production caps typically set at just above the level of the state's largest winemaker. Such laws, Genesen said, seek to circumvent the 2005 U.S. Supreme Court decision in Granholm v. Heald, which held that laws permitting in-state wineries to ship directly to customers--but barring out-of-state wineries from doing the same--are unconstitutional under the commerce clause.

Genesen has had an unusual career. In 1997, she and her husband planted a 20-acre vineyard in Fiddletown, Calif. At the time she worked for the state bar association, but for obvious reasons took an interest in the Granholm case as it wove through the court system. When she went into private practice, she began to represent Family Winemakers of California, which was a plaintiff in Granholm. It was Genesen, in fact, who hired Kirkland & Ellis lawyer Kenneth Starr to argue the Granholm case in the Supreme Court. After the winemakers won, Kirkland recruited her to join the firm.

Genesen told us that she spends 85 percent of her time on wine cases--but is quick to say that this does not make her an oeno-expert. "My family and friends assume that I'm more knowledgeable than them, but that isn't necessarily the case," she said. Still, the job comes with some undeniable perks. "I've learned a lot from clients," she told us. "I get to taste and hear about a lot of wines."

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