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Dickie Scruggs, a plaintiffs’ lawyer whom most corporate executives normally regard with something approaching naked terror, is doing his best to keep his one corporate defense client out of bankruptcy. But the 6th U.S. Circuit Court of Appeals is threatening to make his job harder. The appeals court says it has “serious doubts as to the legitimacy” of an unusual settlement between Scruggs’ client, Sulzer Orthopedics Inc., and a group of plaintiffs’ lawyers. On Oct. 29, the court temporarily reversed a lower court ruling that would have prevented trials in dozens of other cases over hip implants made by the company. In re Inter-Op Hip Prosthesis Product Liability Litigation, No. 01-4039. The settlement is designed to push all plaintiffs nationwide into the deal by delaying for six years any payments to those who pursue their own cases. At a time when some companies face overwhelming liability — over recalled drugs, dangerous tires, building materials manufactured decades ago — many lawyers are watching the Sulzer deal closely. “There is no legal vehicle available for a company besides trench warfare or just bankruptcy right away,” Scruggs said, defending the deal in September. “We think this is a paradigm for a company willing to do it.” Critics say the deal benefits Sulzer and the settling lawyers at the expense of hundreds of people injured by defective hip implants. “This was a settlement that was not a little bit, but a lot, over the line,” says Columbia University Law School Professor John C. Coffee Jr. “This solution was too clever by half. If you could do this in this case, you could do it in any mass tort.” In December 2000, Sulzer, the Austin, Texas-based subsidiary of Switzerland’s Sulzer Medica, recalled 40,000 of its devices called Inter-Op acetabular shells. They are designed to be attached to the pelvis during hip replacement surgery. The recall came after reports that, in some patients, the implants were not bonding properly to the bone, causing severe pain and raising the possibility that the implants could fail. A residue of machining oil left on the implants during manufacture was determined to be the cause of the problem. At the time of the recall, 26,000 of the implants had already been used in patients. Sulzer estimated that 4,500 would eventually need new surgery to replace the implants. The company quickly became the target of hundreds of suits across the United States. They included federal multidistrict litigation in the Cleveland court of District Judge Kathleen M. O’Malley. But most of the cases are in state courts, particularly in New York, Texas, California and Florida. Before O’Malley called a litigation time-out, Sulzer faced the possibility that 40 claims would be tried by the end of this year. Very quickly, by the calendar of most mass tort lawsuits, Scruggs had put together an unusual plan to keep the company alive, while paying an estimated $780 million in cash and company stock to people who had been harmed. The settlement is based on a class action filed in O’Malley’s court that covers all U.S. residents who had the recalled devices implanted. The deal sets up a table of payments that depend on the problems suffered by implant patients and whether they require replacement surgery. In response to appeals court rulings that have struck down mandatory settlements in personal injury class actions in recent years, the deal allowed individual plaintiffs to reject the deal and sue on their own. But many plaintiffs’ lawyers are calling the right to opt out a sham. They say they would win their clients much more than would be provided under the settlement. The deal calls for Sulzer to put a lien on all of its assets, giving settling class members first claim, over plaintiffs who decide to go it alone, for six years. If the plan is approved, plaintiffs — many of whom are elderly — would not be able to collect until 2008 or so. By then, there may be no money left to pay successful verdicts in any case, the critics say. According to Scruggs, this is necessary to keep Sulzer out of bankruptcy court, where plaintiffs could expect a long delay and a recovery of only a fraction of what their cases are worth. LOADED GUN? “I’ve got a lot of respect for Dickie Scruggs,” says Mikal Watts of Corpus Christi, Texas’ Watts & Heard, “but through some very clever lawyering, he’s created an opt-out class action with a gun to the head of anyone who wants to opt out.” In August, Watts won $15.5 million, most of it in punitive damages, for three Texas women whose defective hip implants had to be replaced. “In a perverse way, it reinforces the notion that the company can’t survive more than 10 or 15 such verdicts,” said Scruggs, shortly after the verdict. “The whole premise is a fair distribution of the assets while keeping the first hogs at the trough from getting it all.” In Watts’ view, the verdict gives more ammunition to the people who are trying to get the settlement overturned. “I think there will definitely be other cases in which they get whacked,” he says. So far, there has been no opportunity to test that prediction. On Sept. 17, just in time to stop a multiplaintiff trial from going forward in a California state court, O’Malley issued an injunction halting litigation over Sulzer’s hip implants across the country. The plaintiffs appealed. The 6th Circuit, apparently troubled that the deal may go too far in forcing plaintiffs to go along with the program, lifted the injunction in its Oct. 29 ruling. “[T]he proposed settlement imposes significant disincentives on the right to opt out of the settlement class,” said the court. “Limitations on the right to opt out raise the due process concerns addressed in” Supreme Court and 6th Circuit precedents. Then on Nov. 8, the court muddied the waters, reinstating O’Malley’s injunction and setting oral argument on the issue for the end of the month. Now that the deal has been called into question, though, Scruggs is busy working on a fallback plan. Early this month, Scruggs met with about 40 lawyers, representing most of the plaintiffs who have sued, at a mass tort seminar in Las Vegas. A week later, he met with lawyers in New York. Lawyers involved in the talks say the discussions were preliminary, with Sulzer’s threatened bankruptcy and the skepticism of the 6th Circuit looming in the background. The state court lawyers say that, before they sign on to any deal, they want to spend some time looking over Sulzer’s books, to assure themselves if the company’s claims of financial distress are real. Scruggs says that if the class action deal is ultimately rejected by the federal courts, Sulzer will try to bring all the individual lawyers into a global settlement. He rules out the possibility of settling cases a few at a time. “We’re not going to go the route of settling inventory by inventory,” Scruggs says. “That’s a fool’s game.” FAMOUS PLAINTIFFS’ LAWYER It’s also a game that, as a successful asbestos plaintiffs’ lawyer, Scruggs has seen played by many defendants in that industry that were driven into bankruptcy. Scruggs’ attacks on Big Tobacco and health maintenance organizations, among other powerful corporate interests, have made him one of the wealthiest and most famous plaintiffs’ lawyers in the country. The brother-in-law of U.S. Senate Minority Leader Trent Lott, R-Miss., Scruggs practices in Pascagoula, Miss., and gained wide attention for helping to spearhead the attack on Big Tobacco that resulted in $246 billion in settlements for state governments that sued the industry. Since that effort, which is reported to have netted his firm more than $1 billion in fees, Scruggs has turned his sights on HMOs and pharmaceutical companies, among other corporate targets. Not surprisingly, most corporate executives would just as soon escape Scruggs’ notice. But after one of the doctors involved in the HMO litigation introduced Scruggs to Sulzer executives, the plaintiffs’ lawyer agreed to try to save the company. Scruggs and Sulzer are not the only strange bedfellows in this deal. The class action firm Lieff, Cabraser, Heimann & Bernstein of San Francisco is aligned with individual plaintiffs in trying to shoot down the class settlement. The firm is often one of the dealmakers in mass lawsuits, defending against objectors who want to be left alone to try individual cases. For now, the cases against Sulzer are on hold, pending a decision from the 6th Circuit. A fairness hearing on the deal is scheduled before District Judge O’Malley in March.

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