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