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BLUE CROSS AND BLUE SHIELD INC. v. PHILIP MORRIS

February 28, 2002

BLUE CROSS AND BLUE SHIELD OF NEW JERSEY, INC., ET AL., PLAINTIFFS
V.
PHILIP MORRIS, INCORPORATED, R.J. REYNOLDS TOBACCO COMPANY, BROWN & WILLIAMSON TOBACCO CORPORATION, LIGGETT GROUP, INC., LORILLARD TOBACCO COMPANY, BRITISH AMERICAN TOBACCO, LTD. DEFENDANTS.



The opinion of the court was delivered by: Jack B. Weinstein, U.S. Senior District Judge

    MEMORANDUM, ORDER AND JUDGMENT

I. Introduction

Plaintiff applies for attorneys' fees based on the recovery from defendants of a judgment in the sum of $18,436,034 including prejudgment interest, from a jury verdict pursuant to section 349 of the New York Business Law. Motions to set aside the verdict were denied. See Blue Cross & Blue Shield of N.J., Inc. v. Philip Morris, Inc., 178 F. Supp.2d 198 (E.D.N.Y. 2001). For the reasons indicated below fees are awarded in the amount of $37,841,054.22.

II. Factual and Procedural Background

This and related litigation have been extensively described. See Blue Cross & Blue Shield of N.J., Inc. v. Philip Morris. Inc., 178 F. Supp.2d 198 (E.D.N.Y. 2001); Blue Cross & Blue Shield of N.J., Inc. v. Philip Morris, Inc., No. 98-CV-3287, 2001 WL 1328414 (E.D.N Y Sept. 27, 2001); Blue Cross & Blue Shield of N.J., Inc. v. Philip Morris. Inc., No. 98-CV-3287, 2001 WL 1328458 (E.D.N.Y. Sept. 17, 2001); Blue Cross & Blue Shield of N.J. Inc. v. Philip Morris, Inc., No. 98-CV-3287, 2001 WL 811930 (E.D.N.Y. May 22, 2001); Blue Cross & Blue Shield of N.J., Inc. v. Philip Morris Inc., 141 F. Supp.2d 320 (E.D.N.Y. 2001); Blue Cross & Blue Shield of N.J., Inc. v. Philip Morris Inc., 138 F. Supp.2d 357 (E.D.N.Y. 2001); Blue Cross & Blue Shield of N.J., Inc. v. Philip Morris Inc., 133 F. Supp.2d 162; Blue Cross & Blue Shield of N.J., Inc. v. Philip Morris Inc., 199 F.R.D. 487 (E.D.N.Y. 2001); Blue Cross & Blue Shield of N.J., Inc. v. Philip Morris Inc., 199 F.R.D. 484 (E.D.N.Y. 2001); Blue Cross & Blue Shield of N.J., Inc. v. Philip Morris Inc., 113 F. Supp.2d 345 (E.D.N.Y. 2000); Blue Cross & Blue Shield of N.J., Inc. v. Philip Morris Inc., 53 F. Supp.2d 338 (E.D.N.Y. 1999); Blue Cross & Blue Shield of N.J., Inc. v. Philip Morris Inc., 36 F. Supp.2d 560 (E.D.N.Y. 1999); Blue Cross & Blue Shield of N.J., Inc. v. Philip Morris Inc., No. 98-CV-3287, 1999 WL 104815 (E.D.N.Y. Feb. 25, 1999). For related tobacco litigation in this court, see Simon v. Philip Morris Inc., 200 F.R.D. 21 (E.D.N.Y. 2001); Simon v. Philip Morris Inc., 124 F. Supp.2d 46 (E.D.N.Y. 2000); Simon v. Philip Morris Inc., No. 99-CV-1988, 2000 WL 1658337 (E.D.N.Y. Nov. 6, 2000); Simon v. Philip Morris Inc., 194 F.R.D. 73 (E.D.N.Y. 2000); Simon v. Philip Morris. Inc., 86 F. Supp.2d 95 (E.D.N.Y. 2000); Nat'l Asbestos Workers Med. Fund v. Philip Morris Inc., No. 98-CV-1492, 2001 WL 477256 (E.D.N.Y. Feb. 27, 2001); Nat'l Asbestos Workers Med. Fund v. Philip Morris Inc., No. 98-CV-1492, 2000 WL 1424931 (E.D.N.Y. Sept. 26, 2000); Nat'l Asbestos Workers Med. Fund v. Philip Morris Inc., No. 98-CV-1492, 2000 WL 1364358 (E.D.N.Y. Sept. 20, 2000); Nat'l Asbestos Workers Med. Fund v. Philip Morris Inc., No. 98-CV-1492, 2000 WL 777834 (E.D.N.Y. June 13, 2000); Nat'l Asbestos Workers Med. Fund v. Philip Morris Inc., 86 F. Supp.2d 137 (E.D.N.Y. 2000); Nat'l Asbestos Workers Med. Fund v. Philip Morris Inc., 71 F. Supp.2d 139 (E.D.N.Y. 1999); Nat'l Asbestos Workers Med. Fund v. Philip Morris Inc., 74 F. Supp.2d 221 (E.D.N.Y. 1999); Nat'l Asbestos Workers Med. Fund v. Philip Morris Inc., 74 F. Supp.2d 213 (E.D.N.Y. 1999); Nat'l Asbestos Workers Med. Fund v. Philip Morris Inc., 23 F. Supp.2d 321 (E.D.N.Y. 1998); Nat'l Asbestos Workers Med. Fund v. Philip Morris Inc., No. 98-CV-1492, 1998 WL 372410 (E.D.N.Y. Jul. 2, 1998); Falise v. Am. Tobacco Co., No. 99-CV-7392, 2000 WL 1880303 (E.D.N.Y. Dec. 27, 2000); Falise v. Am. Tobacco Co., No. 99-CV-73 92, 2000 WL 1880305 (E.D.N.Y. Dec. 27, 2000); Falise v. Am. Tobacco Co., No. 99-CV-7392, 2000 WL 1804542 (E.D.N.Y. Dec. 4, 2000); Falise v. Am. Tobacco Co., No. 99-CV-7392, 2000 WL 1804602 (E.D.N.Y. Nov. 30, 2000); Falise v. Am. Tobacco Co., No. 99-CV-7392, 2000 WL 1737941 (E.D.N.Y. Nov. 21, 2000); Falise v. Am. Tobacco Co., No. 99-CV-7392, 2000 WL 1370437 (E.D.N.Y. Sept. 21, 2000); Falise v. Am. Tobacco Co., No. 99-CV-7392, 2000 WL 1336697 (E.D.N.Y. Sept. 15, 2000); Falise v. Am. Tobacco Co., No. 99-CV-7392, 2000 WL 1292671 (E.D.N.Y. Sept. 8, 2000); Falise v. Am. Tobacco Co., 107 F. Supp.2d 200 (E.D.N.Y. 2000); Falise v. Am. Tobacco Co., No. 99-CV-7392, 2000 WL 1144697 (E.D.N Y July 25, 2000); Falise v. Am. Tobacco Co., No. 99-CV-7392, 2000 WL 1010982 (E.D.N.Y. July 19, 2000); Falise v. Am. Tobacco Co., No. 99-CV-7392, 2000 WL 1010978 (E.D.N.Y. July 18, 2000); Falise v. Am. Tobacco Co., 94 F. Supp.2d 316 (E.D.N.Y. 2000); Falise v. Am. Tobacco Co., No. 99-CV-7392, 2000 WL 433097 (E.D.N.Y. Apr. 18, 2000); Falise v. Am. Tobacco Co., 91 F. Supp.2d 525 (E.D.N.Y. 2000); Falise v. Am. Tobacco Co., No. 99-CV-7392, 2000 WL 264332 (E.D.N.Y. Jan. 24, 2000) (Nos. CV-98-1492, CV-97-7658, CV-98-3287, CV-98-675); Falise v. Am. Tobacco Co., 193 F.R.D. 73 (E.D.N.Y. 2000); Falise v. Am. Tobacco Co., 241 B.R. 63 (E.D.N.Y. 1999); Falise v. Am. Tobacco Co., 241 B.R. 48 (E.D.N.Y. 1999); Falise v. Am. Tobacco Co., No. 99-CV-7392, 1999 WL 98626 (E.D.N.Y. Feb. 18, 1999) (Nos. 97-CV-7640, 97-CV-7658, 98-CV-675); Falise v. Am. Tobacco Co., No. 97-CV-7640, 1998 WL 372401 (E.D.N.Y. July 2, 1998); Bergeron v. Philip Morris Inc., 100 F. Supp.2d 164 (E.D.N.Y. 2000); Bergeron v. Philip Morris Inc., No. 99-CV-6142, 2000 WL 748144 (E.D.N.Y. June 8, 2000); H.K. Porter Co., Inc. v. Am. Tobacco Co., 71 F. Supp.2d 73 (E.D.N.Y. 1999); In re Tobacco Litig., 193 F.R.D. 92 (E.D.N.Y. 2000); In re Tobacco Litig., 192 F.R.D. 90 (E.D.N.Y. 2000); In re Simon II Litigation, 172 F. Supp.2d 375 (E.D.N.Y. 2001); In re Simon (II) Litig., Nos. 00-CV-5332, 98-CV-0675, 99-CV-6142, 98-CV-1492, 97-CV-7658, 99-CV-1988, 98-CV-3287, 99-CV-7392, 2000 WL 1252182 (E.D.N.Y. Sept. 6, 2000).

In April 1998, numerous Blue Cross health plans from across the nation, including New York's Empire Blue Cross and Blue Shield ("Empire") filed suit against the major tobacco companies to recover the extra money they were forced to spend on patients harmed by tobacco as a result of alleged fraud by defendants. The legal and factual issues were significant to the parties and to society. The stakes were such as to warrant comprehensive presentation by the best attorneys available to plaintiff and to defendants. Plaintiffs sought some $10 billion in damages, subject to trebling. The case also was potentially important as a precedent.

After a national search for qualified counsel, the group of Blue Cross/Blue Shield plans, including Empire, retained Dewey Ballantine LLP ("Dewey") in March 1998 to represent them in this action. The Agreement for Professional Services provided for various levels of fees to be paid to Dewey. A portion of the fees was structured as an incentive or contingency arrangement, labeled the "Success premium." This arrangement was in part a standard contingency fee, allowing Dewey a portion of any recovery. The contingency percentages were higher if the judgment was higher. Potential fees under the agreement were sizeable. If plaintiffs were awarded more than approximately $4.5 billion of the $10 billion claimed, the fee was to be $185 million. For smaller awards, fees were less, both because they were percentages of a smaller gross, and because the percent applied was smaller.

If fully successful, the suit would have resulted not only in a huge verdict in the instant case, but a threat to the economic viability of defendants in other suits based on the litigation template plaintiffs counsel would have created. The policy of New York state in encouraging such quasi-attorney general suits to deter fraud on consumers would have been uniquely vindicated.

The court closely observed plaintiffs counsel and was able to obtain a good sense of its efforts in preparation, in depositions, and in court. See, e.g., Blue Cross, 178 F. Supp.2d at 253-55. Dewey tried this case with uncommon skill. So too did counsel for defendants.

The Dewey core trial team included four partners, each with more than 26 years of experience, plus junior partners and associates. One senior partner is a former Chair of the Litigation Section of the American Bar Association and has been involved in numerous business and commercial litigations. Two have extensive experience in complex commercial litigation. Another partner practiced law at the Department of Justice and assisted the United States Senate and the United States House of Representatives in key matters.

Litigation was extensive, lasting over three years and consuming 44 trial days. The amount of time devoted to the case was appropriate because of the nature of the case and the complex issues involved at the trial. See Blue Cross, 178 F. Supp.2d 198 (detailing extensive nature of trial). The trial required 34 witnesses, 10 of whom were Daubertized — Daubert screened experts; there were 1,632 demonstratives and exhibits, and over 100 depositions utilized in court.

The effort plaintiffs counsel put into the case was fully warranted. Extensive use of paraprofessionals to reduce costs was appropriate. Briefing and arguments were extensive, but were required by the nature of the litigation. Dewey traveled throughout the country, representing Empire at over 300 subscriber video depositions, many of which appropriately were heard at trial. It deposed 29 of the defendants' executives and employees. The parties filed over 150 legal memoranda and argued many of these applications. The docket sheet contains over 1400 entries. Computer technicians were able to quickly access data, diagrams, charts and depositions and display them on a huge screen for the jury. The parties used questionnaires, surveys, statistical evidence and modeling, and other advanced and often novel but appropriate statistical techniques. Reproduction of hundreds of thousands of pages of documents from Empire's files for the many defense counsel and the court was needed.

Plaintiff alleged a number of claims including antitrust, conspiracy, RICO, New York Consumer Protection Act ("Act"), and common law fraud. A continuing conspiracy was proved for evidentiary purposes, warranting evidence both before and after 1980 — the effective date for the litigation of the Act — with damages based solely on post 1980 actions of defendants and reliance by smokers. The jury verdict established, apparently for the first time, that the tobacco industry had engaged in statutorily banned deceptive practices harming a third party payor and its subscribers. The jury returned a verdict of $17 million for the plaintiff on the claim under section 349 of the General Business Law and just over $11 million on a subrogated claim under section 349. The other claims were unsuccessful.

On September 19, 2001, Dewey filed a motion for award of attorney's fees under section 349(h) of the New York General Business Law. Plaintiffs originally sought $39,086,223. This figure reflected 144,256.67 hours of necessary legal work, which is an average rate for partners of $271 per hour, somewhat less than those of comparable New York law firms. Excluded from this amount was work performed by anyone billing less than 50 hours for the matter and law clerks, summer associates, and law librarians.

Dewey kept contemporaneous time records and was conservative. For example, it included only half of the total time for conferences between the firm and its client throughout the representation.

In preparation for the motion for attorneys' fees the court issued a memorandum and order setting guidelines for argument and suggesting criteria for setting the fee. See Blue Cross, 2001 WL 1328414 at *1-*2 (Sept. 27, 2001). An evidentiary hearing was scheduled. Plaintiff submitted and supplemented affidavits supporting its application for over $39 million in fees. The parties were allowed ample time for full discovery on the question of fees. Voluminous attorney time sheets were entered into evidence.

Defendants did not accept the suggestion that they cross-examine the affiants or submit evidence of their own. They agreed not to challenge the reasonableness of the hours expended or the hourly rates charged. See Defendants' Motion of Dec. 21, 2001 at 33-34. The parties agreed not to place on the record the fees charged by defense counsel to their clients — which the court estimates were substantially in excess of plaintiffs claims.

III. Law

This section includes 5 parts: (1) The policy supporting allowance of legal fees; (2) statutory authorization of attorney's fees; (3) the law on certain procedural questions; (4) Federal law on attorney's fees; and (5) state law on attorney's fees.

1. Policy supporting allowing fees

The basic rule regarding attorney's fees is "the general `American Rule' that the prevailing party may not recover attorney's fees as costs or otherwise." Alyeska Pipeline Service Co. v. The Wilderness Society, 421 U.S. 240, 245, 95 S.Ct. 1612, 44 L.Ed.2d 141 (1975). This contrasts with the system in England, where "for centuries . . . there has been statutory authorization to award costs, including attorney's fees[.] [C]ounsel fees are regularly allowed to the prevailing party." Id. at 247; cf. id. at n. 18 (extensive history of English rule, including that fees in England have been allowed to defendants since 1278 and plaintiffs since 1607); id. at 248-54 (ad hoc United States jurisprudence on the issue prior to establishment of the American rule in 1853, the enactment of a statute in 1853 establishing the American rule, and the later court decisions enforcing the American rule); 28 U.S.C. § 1920, 1923 (2001) (successor sections to the 1853 act, allowing costs to include only certain small docket fees). Costs and disbursements allowed in the United States originally closely approximated actual legal fees as in England, but inflation and a failure to adjust these fees have now resulted in their being largely nominal. See Harold L. Korn et al., New York Civil Practice ¶¶ 8101.17; 8201.03; 8301.01; 8301.04 (1995) (history of costs and disbursements, including the fact that they now bear little resemblance to actual litigation costs). There is now a slight tendency towards adoption of the English system in the United States, as reflected in this memorandum, Rule 11 of the Federal Rules of Civil Procedure and various statutes listed below.

There are a few exceptions under common law to the American rule. The losing party may be compelled to pay attorney's fees where there is bad faith, or under a common law theory of "common benefit." Alyeska, 421 U.S. at 245. United States courts have been reluctant to expand any common law right to attorney's fees, concluding that it is "inappropriate for the Judiciary, without legislative guidance, to reallocate the burdens of litigation in [this] manner[.]" Id. at 247.

To recover attorney's fees in the United States, a party must generally be authorized by a statute to do so. There are a number of Federal statutes or causes of actions which allow attorney's fees to be awarded in some cases. These include Title VII of the Civil Rights Act of 1964, 42 U.S.C. § 2000e-5(g)(1) (2001); antitrust statutes. 15 U.S.C. § 4304 (2001); trademark laws, 15 U.S.C. § 1117 (2001); copyrights, 17 U.S.C. § 505 (2001); the Fair Debt Collection Practices Act, 15 U.S.C. § 1692 (2001); the Fair Labor Standards Act, 29 U.S.C. § 216 (2001); the Age Discrimination in Employment Act of 1967, 29 U.S.C. § 626(b) (2001); and the Americans with Disabilities Act, 42 U.S.C. § 12205 (2001). In addition, attorney's fees for Consumer Act suits brought under New York state law may be recovered under section 349(h) of New York General Business Law which provides that "[a] court may award reasonable attorney's fees to a prevailing plaintiff" N.Y. Gen. Bus. Law 349(h) (Consol. 2001). (This section is discussed in some detail in section III.5, infra.)

Allowing fees in lawsuits introduces an added element of financial risk for the parties. Attorney fee statutes add the possibility of high legal fees — possibly higher than the ultimate award — which may act as a deterrent to parties who might otherwise bring a suit or defend one. The American legal system is not designed to minimize or balance all risks in litigation; for example, the risk of incurring legal costs in a frivolous suit is placed on the plaintiff, because we wish to discourage frivolous suits. See, e.g., Fed.R.Civ.P. 11 (sanctions allowed for unnecessary, harassing or frivolous pleadings). For appropriate suits, statutes allowing plaintiffs to recover attorney's fees can mitigate some of the risk to them of litigation.

The risk reduction to plaintiffs is made by increasing the potential gain for a successful suit. A general formula for plaintiffs potential gain in any given suit under the American rule (ignoring the minimal taxable costs and disbursements allowed the victor) might be superficially described as:

[(percent chance of success) x (likely award)] − cost of conducting litigation.

If that formula results in a positive number, it is rational for a plaintiff to bring suit. (There may also be independent business reasons, as for example to demonstrate to copyright violators that a violation will be prosecuted as a deterrent).

The effect of a statute allowing for attorney's fees to be shifted to the defendant is to modify the equation as follows:

[(percent chance of success) x (likely award)] − [(legal fees element of cost of conducting the litigation) x (chance of loss)] — other costs of conducting litigation.

This equation is more likely to result in a positive number, because the cost to a plaintiff of conducting the litigation is less of a negative in the equation, that is to say, less of a deterrent.

Fee-shifting statutes favoring plaintiffs are most effective in modifying the calculus for lawsuits worth bringing on their merits. The introduction of the new variable has a large effect if the chance of loss is small (only 10%, for example) which would probably be considered a lawsuit worth pursuing. Where chance of loss is higher, the effect of the statute is reduced. For example, if the chance of loss is 90% or more — a prototypical frivolous lawsuit — the fee statute will have a substantially reduced effect. When there is added to the risk to plaintiff the possibility of awarding defendants their fees for a frivolous suit brought against them, the pressure on a plaintiff not to bring actions without good cause increases substantially, and in effect the English system is imposed.

Assuming the plaintiffs case meets the very low standard of non-frivolousness, statutory fee awards obviously encourage the plaintiff (treating the plaintiff and his lawyer as one economic entity for purposes of this analysis) to sue and to demand settlement at a higher level since the total net recovery will be greater if the plaintiff obtains a judgment. Since the defendant will not collect statutory fees if it wins (again assuming minimum standards of suit viability), the cost of settlement will go up because the potential loss is greater.

Calculations become more complex when the benefits and detriments are analyzed separately for the client and the attorney, whose interests are not the same. They will also be affected by a judgment on how the court will exercise its fee-granting discretion.

The probability of settlement will not in general be increased by the availability of statutory fees because plaintiffs' willingness to settle at a figure that would have been appropriate without the statutory fee will be reduced. To settle plaintiff will demand more. Cf. Hans Zeisel, Harry Kalven, Jr., and Bernard Buchholz, Delay in the Court 111-19 (1959) (effect of delay on settlement). The psychological realities may actually reduce the chances of settlement should the defendant, for example, resent the added toll the law imposes on the damages actually caused by it, or should it wish to discourage future, more costly suits. By contrast, here plaintiffs might have sued in part to discourage defendants from leading its insureds into smoking — as a kind of a legal-medical prophylactic for diseases caused by smoking. Like sophisticated factors may have impacts on litigation different from that to be expected from a superficial economic analysis. In general, however, the net effect of a statutory change permitting plaintiffs, but not defendants, to obtain legal fees is to increase the cost to possible malefactors and to encourage suits against them — the apparent design of the legislature.

There are several policy reasons suggesting why attorney's fees might be appropriately awarded in particular cases. In some cases, awards of one side's attorney's fees can have the effect of punishing a losing party. Cf. John T. Noonan, Persons and Masks of the Law 136-44 (1976) (commenting on the de facto punishment in the 1928 decision by the New York Court of Appeals which required Helen Palsgraf, whose annual income was $416, to pay costs of $350 to victorious defendant Long Island Railroad, which had millions in assets). In such cases, fee-shifting serves to discourage suit.

Another objective is to encourage suit. For example, in the last thirty years, courts have sometimes awarded fees under a "private attorney general" theory that "worthy claimants should not be discouraged from asserting rights embodying important public interests because of a lack of financial resources." Incarcerated Men of Allen County Jail v. Fair, 507 F.2d 281, 285 (6th Cir. 1974). Since the Supreme Court's decision in Alyeska, courts have been discouraged from allowing fees under a "private attorney general" theory except when authorized by legislation. The rationale behind this approach is similar to that embodied in decisions requiring that litigants be allowed free access to court. See, e.g., Boddie v. Connecticut, 401 U.S. 371, 91 S.Ct. 780, 28 L.Ed.2d 113 (1971) (state must waive filing fees for indigent applicants for divorce).

Private attorney general suits have the advantage to the state of reducing the burden on its underfunded prosecutorial staffs. Without private suits the state policy would not be enforced in many instances. An important example is qui tam suits based on frauds against the government. See, e.g., False Claims Act of 1986, Pub. L. 99-562, 100 Stat. 3153 (codified as amended at 31 U.S.C. § 3729-3733 (2001)) (authorizing qui tam enforcement in False Claims Act suits).

Another advantage of plaintiff attorney fee awards is that they serve to allocate costs in so-called "common fund" cases. Alyeska, 421 U.S. at 257. In some jurisdictions, fees may be awarded where a party secures a "substantial benefit" to another party or to the public. See generally Serrano ...


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