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The Spitzer Backlash

As state attorneys general clamp down on corporate wrong-doers, companies fight back.
Tim Reason, CFO Magazine
March 15, 2006

At least once a week, Pennsylvania Attorney General Tom Corbett gets an E-mail asking him to join his fellow attorneys general in signing letters to Congress, announcing joint positions — or, frequently, suing companies.

He reads the invitations carefully — and also checks to see who has signed on. "Sometimes you can tell that the state [attorneys general] signing on are activists," says Corbett. "They probably have an agenda different than mine."

Corbett describes himself as an "active, not activist" attorney general who understands the "detrimental effect" of politically charged enforcement actions. He should. From 1998 to 2002, he served as vice president of government relations for Waste Management, representing the scandal-plagued company before regulators and legislators in 14 states. An easy target, the company was regularly written up for a slew of hauling and dumping violations in several of those states. "The frustrating part," he recalls, "was trying to diffuse the heat of political rhetoric to look at the facts."

Today, he says, that experience helps him to be "fair and balanced" in deciding whether Pennsylvania joins multistate suits. Two summers ago, for example, New York State Attorney General Eliot Spitzer led an eight-state suit against power-plant owners for causing global warming. Some of the AGs in that action, Corbett now says, "signed on totally for political purposes."

State attorneys general have been banding together to take corporate wrongdoers to task for decades. That tactic has matured over the past few years, creating a powerful new regulatory force. Recently, attorneys general have forced changes in business practices and extracted millions of dollars in settlements from such household names as DirectTV, Western Union, Blockbuster, and, in January, mortgage giant Ameriquest. (Pennsylvania was a participant in most of these suits.)

Now, a corporate backlash is brewing. Angered by the growing prosecutorial fervor and the efforts to impose restrictions on their operations, some of the nation's largest companies are pressing a campaign to rein in aggressive attorneys general and elect candidates more friendly to business.

Hitting Back
Such a campaign has been long anticipated. Taking a swing at the nation's big corporations is risky business, says James Tierney, former attorney general for Maine and now head of the National Attorneys General Program at Columbia Law School in New York. Sooner or later, he warns, "they hit back."

The U.S. Chamber of Commerce is leading the charge with a state-by-state ground war to elect more business-friendly attorneys general. This will be a watershed year for such contests: 29 of the 43 elected attorneys-general seats are up for election in 2006. (In seven other states and the District of Columbia, the attorney general is appointed, not elected.) Once regarded as merely local affairs, these races are now seen as critical to corporate interests.

The Chamber's Institute for Legal Reform (ILR) is spending millions to try to influence elections in 2006. The Institute is the fourth largest lobbying group in the United States, according to PoliticalMoneyLine, which tracks such data from its offices in Washington, D.C. Since 2000, the ILR says it has targeted 16 attorney-general races, and it has claimed victory in 13. Its campaign spending topped $14.1 million in 2004, the last full year for which statistics are available.

Even primary races in less-populous states are becoming expensive and shadowy battlegrounds. In 2004, for instance, the ILR poured $1.4 million into negative television ads aimed at defeating a candidate in Washington State who was regarded as antibusiness. It took a lawsuit by the state's public-disclosure commission to reveal that the Institute was the sole source of funding behind the local organization that bought the ads. Their target, Deborah Senn, still won the primary, but ultimately lost to Republican Rob McKenna. Spending by probusiness groups "spiked in the last election cycle," says Agustin Armendariz of the Center for Public Integrity, a campaign-finance watchdog in Washington, D.C. "They are putting a lot of money into relatively obscure races."

Drug Money
This year's most-watched election will be the race to replace Eliot Spitzer in New York. But the real battles are likely to take place in such states as Michigan, Wisconsin, and Minnesota. Again, the ILR is likely to use its resources to support probusiness candidates, most of them Republicans, in these states and others.

During the last election cycle, which includes contests in 2003 and 2004, the ILR donated $1.1 million to the Republican State Leadership Committee (RSLC), the parent organization of the Republican Attorneys General Association, whose members are considered less aggressive in their efforts to police corporate activity. (In contrast, the Institute gave $10,000 to the Democratic Attorneys General Association.) Among the top 50 corporate contributors to the RSLC in the upcoming election cycle are three of the largest tobacco companies, six of the largest pharmaceutical firms, and three of the largest telephone companies in the United States. Since the RSLC's Republican Attorneys General Association was formed in 2000, the number of Republican attorneys general has climbed from 14 to 21.


Corporate America is firing salvos on the legal front, as well. The Competitive Enterprise Institute, a probusiness advocacy group in Washington, D.C., filed suit in federal court last summer to challenge the legality of the landmark tobacco settlement negotiated by a group of attorneys general in 1998. Considered a groundbreaking victory for state activism, the settlement of more than $200 billion also imposes restrictions on the advertising and marketing of cigarettes. In its lawsuit, the Competitive Enterprise Institute argues that the U.S. Constitution prohibits states from imposing multistate agreements without the approval of Congress.

Unholy Matrimony
Perhaps more significantly, probusiness groups are seeking to disarm the states' top cops by limiting the use of their most potent and controversial weapon: the plaintiffs' bar. In certain large, multistate actions, attorneys general have hired private lawyers to bring lawsuits against companies on a contingency-fee basis. Probusiness groups deride the practice for its potential conflicts of interest, noting that private lawyers tend to be big contributors to the campaign funds of attorneys general.

"That is a matrimony of the unholiest sort," says Steve Hantler, assistant general counsel for giant automaker DaimlerChrysler. "Plaintiffs' lawyers are motivated by the pursuit of profit. State attorneys general should be motivated by the pursuit of justice."

Efforts by Hantler and others to curb the practice have been gathering momentum. Since 1999, seven state legislatures have passed laws that limit the practice. Connecticut and Minnesota, two states whose attorneys general are considered aggressive in pursuing corporate wrongdoers, passed such bills last year. A similar bill is now pending in Mississippi, the state that first blessed the practice by recruiting a plaintiffs' attorney to sue the tobacco companies. Probusiness groups also are waging battle on the public-relations front. The American Enterprise Institute (AEI), a conservative think tank in Washington, D.C., recently launched a blog, called AG Watch, that is highly critical of what it deems activist attorneys general. A recent entry mocked Texas AG Greg Abbott, who filed suit against Sony in late 2005 for embedding spyware into music CDs. "The Texas suit...could be Exhibit A in the case against the wacky shell game attorneys general play with the national (and international) economy," the blog charges. The blog is one of the most popular items on the AEI's Federalism Project Website.

Legal Backwater
"Activist" attorneys general are increasingly regarded by some business interests as powerful foes. This wasn't always the case. Attorneys general once occupied a dull backwater in the legal world, providing legal counsel to state officials and agencies.

That changed during the 1980s, as states' attorneys general responded to the Reagan Administration's deregulation push by increasing their own regulatory efforts. "The absence of federal action creates, and even invites, proactive state enforcement," argues Connecticut Attorney General Richard Blumenthal. In answer to the growing chorus of complaints from the business lobby, attorneys general also note that multistate actions often are brought in response to thousands of consumer complaints. "When we bring one of these major cases as a group of states, we really need to be focused on a company that has been engaged in substantial wrongdoing," notes Iowa Attorney General Tom Miller.

"A multistate [action] cannot be successfully mounted unless there is powerful merit," echoes Blumenthal. "Ameriquest is a good example. We didn't pick Ameriquest out of the phone book; Connecticut alone had 200 compelling and significant complaints from people whose lives were devastated by predatory loan practices." In January, Ameriquest agreed to pay $325 million, institute internal reforms, and submit to an independent monitor to settle charges of predatory lending practices.

Speedy Capitulation
Iowa's Miller has served as attorney general since 1979 (with the exception of one four-year hiatus) and took part in the first multistate settlement (against General Motors). He says states initially formed alliances defensively, fearing that corporate defendants with big legal budgets would outgun individual states. "We quickly learned there was an offensive dynamic to it," says Miller. "Companies did not want to defend 10, 15, 25 lawsuits in different states.... They'd prefer to settle."

Consider what happened when a group of attorneys general aimed their fire at Blockbuster, the Dallas-based video-rental chain. In 2005, Oregon Attorney General Hardy Myers led an effort by state AGs to challenge the company's widely touted "no late fees" policy as deceptive. Blockbuster hired former Virginia AG Andrew Pickens Miller, now a partner with Powell Goldstein LLP in Washington, D.C. Miller's task was not to fight the suit, but to recruit more states to join it, averting a potential avalanche of follow-on litigation. Miller succeeded in bringing the total number of participating states to 47 (plus the District of Columbia). Over the years, the AGs' power has grown and the number and size of multistate settlements continue to grow. The National Association of Attorneys General has played a key role in the rise of what critics say has become a litigation factory. Based in Washington, D.C., the nonprofit group coordinates efforts by attorneys general to prosecute corporate targets, and often receives a portion of the settlements to fund future actions. Roughly twice a month, Jerry Kilgore, former Virginia AG, recalls he would receive appeals from the association to join in litigation against companies. He says he turned down many because he regarded them as unreasonable. "Around the nation, our elected officials are trying to run the boardroom," says Kilgore.


Lightning Rod
Other attorneys general are also beginning to cast a somewhat critical eye on such litigation. At a debate on the topic last December, Michigan AG Michael Cox complained that elected attorneys general face pressure to accept any settlement that brings money to their constituents. "People in my state are going to say, 'Why didn't you join that?'" he said. "To say the merits [of the case] weren't that great, you know, voters don't really care about that."

What was the lightning rod for the backlash against so-called activist AGs? Among corporate executives, concern began to heighten after the tobacco settlement in 1998. Then came New York's Spitzer (now a gubernatorial candidate). Since taking office in 1999, Spitzer has prosecuted corporate wrongdoers with zeal, garnering both praise and notoriety for his successful prosecutions and settlements. Indeed, Spitzer's 2002 investigation of Merrill Lynch fundamentally changed the nation's financial markets — and further raised fears among corporate executives that other attorneys general would follow his aggressive lead.

One of the few corporate leaders who will talk openly about the backlash is DaimlerChrysler's Hantler. Hantler is also chairman of the State Government Leadership Foundation, an affiliate of the Republican Attorneys General Association, and chairman of the legal-reform advocacy group American Justice Partnership. "More and more state attorneys general see [industry lawsuits] as either an opportunity for revenue enhancement [for their state] or career development," he charges. "That should be a concern for all business leaders."

Although DaimlerChrysler has not been the target of prosecutorial efforts by attorneys general, Hantler believes that "attorneys general activism" is an issue that's important to all corporate executives. "If a company is not in the crosshairs of plaintiffs' lawyers or state AGs, they tend to think it is not their problem," Hantler says. "They're wrong." Sooner or later, he warns, some of those companies may find themselves the target of an AG lawsuit.

Tim Reason is a senior editor at CFO. Reporter Laura DeMars contributed additional reporting.


Fear Factor
New York Attorney General Eliot Spitzer may get all the ink, but one way or another, he'll hand over his badge this fall. Here are some of the AGs that remain the most feared by business — and a few corporate pelts they've collected.
Attorney General/State Legal Actions and Settlements
Richard Blumenthal
Connecticut
Blumenthal helped lead the 1998 antitrust suit against Microsoft before the federal government took it over. With seven other AGs, he pushed legal limits by suing five big utilities for CO2 pollution in 2004. The suit was dismissed last September.
Bill Lockyer
California
Lockyer led an eight-state action against Eli Lilly in 2002 after the company allegedly failed to protect the privacy of consumers who sought information on Prozac. Lilly paid $160,000 and agreed to five years of compliance reviews.
Lisa Madigan
Illinois
Madigan and Florida AG Charlie Crist led an effort that yielded a $21 million settlement with Ford and its dealers in 2004; 38 AGs had accused the automaker of overcharging customers for early termination of car leases.
Greg Abbott
Texas
Abbott sued Sony BMG last November for placing spyware on music CDs; the case is pending. Abbott, who holds a BBA degree in finance, has negotiated millions in settlements with pharmaceutical firms for various types of Medicaid fraud.
Tom Miller
Iowa
A veteran AG who helped press the first multistate settlement against GM in 1979, Miller helped force Ameriquest and Household Finance to pay $325 million and $484 million, respectively, to settle states' charges of abusive lending practices.
William H. Sorrell
Vermont
Sorrell led a 50-state (plus D.C.) action in 2004 against Pfizer unit Warner-Lambert for marketing nonapproved uses of its best-selling drug Neurontin. Pfizer settled, ultimately paying $38 million.


AGs Score Big
Here are some of the largest settlements between corporations and attorneys general
2006
Date/Company Complaint Number
of states
Penalty* Remedies
1/24
Ameriquest
Misrepresented loan terms and inflated appraisals 49+DC $325 million Improve disclosure of loan terms and change sales incentives to eliminate conflicts of interest
2005
12/13
DirecTV
Failed to clearly disclose charges and limits of program availability to customers signing long-term contracts 22 $5 million Improve disclosure, allow free service cancellations, and pay restitution to consumers making complaints related to the settlement
11/14
Western Union
Allowed high volume of money to be wired to scam artists and other fraudsters 47+DC $8.1 million** Fund national awareness campaign, post prominent fraud warnings, improve agent training, and work with states to block transfers to known scam artists
3/30
Blockbuster
Misled customers with "No late fees" promotion 47+DC $630,000 Provide one-time full refund to customers who did not understand program
1/10
State Farm Mutual Insurance
Did not properly mark the titles of vehicles taken from policyholders due to damage or theft 49+DC $40 million*** State Farm will pay to identify improperly titled vehicles and locate their new owners to provide compensation
2004
10/20
Organon USA
Violated antitrust laws by delaying entry of generic competition for antidepressant drug Remeron 50+DC $36 million Agreed to injunctive relief requiring timely listing of patents and prohibiting company from submitting false or misleading listing information to the FDA
8/12
Alpharma and Perrigo
Violated antitrust laws by jointly plotting to eliminate competition for generic versions of Children's Motrin 50+DC $1 million
+
$10,000 to each state
Combined $1m payment from the two firms paid directly to the National Association of Attorneys General to support future antitrust actions
7/22
Verizon, Cingular, and Sprint PCS
Misled consumers with ads and unclear disclosures regarding service-agreement terms and wireless-coverage areas 32 $1.67 million each All three carriers to provide coverage maps to consumers, and give them two weeks to terminate service contracts without incurring any penalties. Also mandates changes to ways carriers advertise and sell their services
6/10
Ford Motor Credit, Ford, Lincoln Mercury Dealers
Overcharged consumers who terminated lease agreements early to purchase their vehicles 38 Approx. $15 million***
+
$6.3 million
Primarily restitution, though Ford voluntarily changed its lease documents and established an 800 number that consumers can call to determine payoff amount
5/13
Warner-Lambert division of Pfizer
Marketed Neurontin for nonapproved uses 50+DC $38 million As part of financial settlement, must fund $28m program to address problems associated with direct marketing by pharmas to doctors
4/26
Medco Health Solutions
Encouraged doctors to switch patients to different prescription drugs, deceptively suggesting the move would save patients money 20 $22.7 million***
+
$6.6 million
Disclose to patients and doctors the cost savings, side effects, and financial incentives for alternative drugs, and inform consumers that they can decline such drugs
2003
5/22
EchoStar Satellite
Failed to clearly disclose the terms and financial conditions customers agree to upon purchase of a satellite dish 13 $5 million Improved disclosure practices, including listing all fees and highlighting those that differ from fees charged by comparable cable-TV services
5/12
Bristol-Myers Squibb
Monopolized the market for the drug Taxol and generic equivalents 50 $55 million The suit, and a related suit over the drug Buspar, ultimately cost the company more than $600 million in settlements with attorneys general, consumers, and competitors
4/24
H&R Block
Charged consumers $22 for optional "Peace of Mind" guarantee without disclosing the charge 41+DC $2.3 million Provide refunds of $22 — totaling about $1m — to consumers claiming they were not informed of the charge
1/27
Aventis Pharmaceuticals and Andrx
Violated antitrust laws when Aventis paid Andrx $90m not to market generic of Aventis's Cardizem CD heart drug 50+DC $80 million*** Restitution to consumers, state agencies, and insurance companies
2002
12/20
Ford
Knowingly sold consumers sport-utility vehicles prone to tire failures and rollovers 50+DC $51.5 million Fund a $30m advertising campaign on SUV safety. Ford also prohibited from misrepresenting the handling characteristics of its SUVs
10/10
Household Finance
Misrepresented loan terms and failed to disclose important information to borrowers 19+DC $484 million Pay restitution to consumers and make extensive changes to lending and disclosure practices
9/30
Various recording companies+
Price-fixing of music CDs 50+DC $67.3 million Provide $75m worth of free CDs to nonprofits, charitable organizations, schools, and libraries
9/6
Salton
Price-fixing of George Foreman grills and pressuring retailers not to sell competing products 44+DC $8.2 million In addition to financial penalty, must cover the costs of notifying consumers about settlement
*Unless otherwise noted, penalties are amounts paid to states in fines and reimbursement of legal or investigative costs.
**To be spent over 5 years for national peer-counseling programs overseen by the American Association of Retired People Foundation.
***To be paid in restitution to consumers.
+Bertelsmann Music Group, EMI Music Distribution, Warner-Elektra-Atlantic, Sony Music Entertainment, Universal Music Group, Trans World Entertainment, MTS/Tower Records, and Musicland Stores.



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