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It was the fourth day of the tobacco fee arbitration hearing, and the distinguished Harvard Law School professor and television personality Arthur Miller was testifying. With his usual authority and verve, he argued to the three judges of a special arbitration panel that they had almost unbounded discretion. In his view, they were not limited by the literal terms of the fee contract before them. Rather, they were free to apply equitable principles and “do the right thing.” Finally the target of Miller’s soliloquy, the one “neutral” official on the panel, spoke up. He had heard counsel like Miller’s before from a trusted adviser. When he was a boy in Kentucky puzzled by a dilemma, John Calhoun Wells told Miller, he turned to his mother. “I asked her, ‘Mama, how can I tell the difference between what’s right or wrong?’ And I’ll never forget: She looked me in the eye, she said, ‘Johnnie boy, you’ll know in your heart the difference between what’s right and wrong.’” For the last four years, Wells has followed his mama’s dictum. During that time he has led the arbitration panel created to ladle out legal fees from the unprecedented $246 billion settlement between the states and the tobacco industry. Like the settlement itself, the legal fees have broken all records. Thus far, the tribunal has awarded $13.6 billion to be paid over roughly 25 years, with three more fees to be announced. [See related chart: And the Winners Are ...] Until recently the fee arbitration process has been a little-noticed sideshow. But this fall, Wells’ panel suffered two stinging rebukes at the hands of state judges. In late September, New York trial court judge Nicholas Figueroa rejected a $1.25 billion award to lawyers who formed what came to be known as the Castano group. By all accounts, they had fought fiercely against the tobacco companies and came close to reaching their own megabillion-dollar settlement with the industry. But in the end, they failed to win a single penny for their clients, and their cases proved no more valuable than their scrapbook of headlines. Nonetheless, with Arthur Miller and a cadre of other legal and political celebrities at their side, they demanded to get rewarded. Wells generously complied, but Figueroa threw out the award. Giving the Castano lawyers more than a billion dollars, the judge declared, was “completely irrational.” [See "As Murky as a Clay Hole"] And in late October, New York trial court judge Charles Ramos froze further payments to lawyers for the state of New York, who received a $625 million fee from Wells’ panel. Ramos said that on its face the award is “potentially excessive and therefore unethical.” These decisions, plus a series of inquiries since July by The American Lawyer, have begun to shed light on the fee award process. The proceedings were private, and only the awards were made public. According to transcripts and interviews with more than 20 participants, the hearings were loosely run events. A labor mediator, Wells had never conducted an arbitration. Testimony was not taken under oath. Celebrity witnesses — some paid, others with personal ties to the parties — offered testimonials in person and on professionally produced videotapes. The hearings were punctuated with folksy aphorisms and down-home appeals to Wells, whose swing vote determined the outcome every time. The panel published decisions with each award. But it followed no rational, consistent formula for setting the fees: Some law firms were paid more than once for the same work; some got credit for the efforts of state attorneys general; others received widely varying awards for indistinguishable tasks. In defense of the huge fees, Wells would occasionally cite the hourly pay of major league baseball players. Of the 19 awards, only six were endorsed by all three arbitrators. (These were mostly at the lower end of the spectrum, ranging from $54 million to $250 million.) For the remainder, the panel disagreed on the award’s size, with the dissent almost always finding the fee too high. Not only the lawyers prospered from this system. Each of the three arbitrators charged as much as $800 an hour, an amount that the industry agreed to in advance. The arbitrators’ fees are confidential, but they’ve likely billed in excess of $5 million. HOW THE PANEL WAS FORMED Born of political need, the Wells panel was midwifed by the usual all-star legal team on call to the tobacco companies. Beginning in the mid-’90s, the attorneys general of a handful of states signed on with a small group of daring plaintiffs’ lawyers bent on challenging Big Tobacco. The battle seemed quixotic, and most states agreed to pay standard contingency fees for any recoveries. When the gargantuan settlement was finally reached in 1998, some of the states were desperate to wiggle out of their contracts. The attorneys general feared a political firestorm if their constituents saw them giving hundreds of millions, and in some cases billions, of dollars of state money to plaintiffs’ lawyers. As a condition of settling, the states insisted that tobacco pick up the tab for its attorneys. Enter Meyer Koplow of New York’s Wachtell, Lipton, Rosen & Katz. Koplow represents Philip Morris Inc., the largest of the tobacco merchants. As part of the master settlement negotiations, he cut a deal with the lead negotiator for the plaintiffs group, Joseph Rice of Charleston, S.C.’s Ness Motley. A three-judge arbitration panel would be set up to determine legal fees, state by state. (The tobacco companies would also pay the arbitrators.) The arbitrations weren’t mandatory; lawyers for numerous, mostly smaller states chose instead to negotiate their fees with the industry. Most of those fees were smaller than the arbitration awards. For the arbitrations, the industry and the plaintiffs’ lawyers would each pick its own, friendly arbitrator, giving each side a vote on the panel. Together they would select the third and neutral vote. The tobacco companies would pay the fees from a separate kitty — but the annual payout would be capped at $500 million, no matter how much the fees totaled. And — in a major concession that the industry would later regret — the tobacco companies pledged not to challenge the fees sought in the first three states to go to arbitration: Mississippi, Florida and Texas. The guidelines for the fee panel, as set out in the Master Settlement Agreement (MSA), were exceptionally vague: They were to determine “full reasonable compensation” by considering “all relevant information.” According to those familiar with the negotiations, the tobacco industry expected to pay between $2 billion and $5 billion. They were wrong. “If ever there were big boys capable of taking care of themselves, it’s them,” says one lawyer involved in the master settlement. “This is the rare instance where the tobacco industry really blew it.” Not even Rice, whose firm has received awards estimated to total approximately $3 billion, has been pleased by the results. “I would never do it again,” he said in an interview about the fee arbitration process. “I don’t think it has worked.” He adds, “I’m not going to sit here and say 12 or 11 billion dollars is unfair. � [But] I would not have distributed it the same way.” WHY WELLS? In October 1998 a group of industry and plaintiffs’ lawyers called Wells to ask him to serve as the neutral member on the new arbitration panel. They reached him in Wyoming, where he was antelope hunting. As Wells recounted in an interview in October, he was surprised by the phone call. After all, he recalls saying, he wasn’t a lawyer. But he knew many. Several lawyers involved in tobacco litigation point out that Wells was friendly with Wayne Reaud and Walter Umphrey, two important Texas plaintiffs’ lawyers involved in tobacco litigation. Both sat on the committee that selected the panel’s chairman. The two lawyers had met Wells when he worked in Beaumont, Texas, and headed the John Gray Institute, a now-defunct entity at Beaumont’s Lamar University created to improve labor-management relations in the region. Reaud was a trustee of the John Gray Institute, and Umphrey is a major Lamar donor. The two lawyers did not return calls. Plaintiffs’ negotiator Rice says he doesn’t recall who suggested Wells, and Koplow declined repeated requests for an interview. Wells, 57, had spent his career largely in the public sector and in academia. After earning a Ph.D. in planning and policy development from Rutgers University in 1977, he went to Capitol Hill, where he was a special assistant to Kentucky senator Wendell Ford for four years. He returned to Kentucky and held a series of state government jobs, including secretary of labor from 1983 to 1987. In 1988 he moved to the John Gray Institute, which he headed for four years. In 1993 President Bill Clinton nominated Wells to be director of the Federal Mediation and Conciliation Service. The FMCS is a small federal agency that trains and provides mediators for labor disputes. Wells developed a reputation as an innovator and was respected by labor and management. He stepped down from that $123,000-a-year post in May 1998 to do mediation consulting. In an interview, Wells declined to say who suggested him for the tobacco fee panel, explaining that he shouldn’t discuss anything related to the arbitrations. He acknowledged that he knew Umphrey and Reaud from his days in Beaumont, and occasionally attended their office Christmas parties. “Beaumont, Texas, is not a big place. I certainly would run into them,” he says. Wells also notes that he has had a “long working relationship with Philip Morris,” going back to his days as Kentucky’s secretary of labor. Leaning back in his chair, and fiddling with a paper clip, Wells presents himself as affable and unpretentious. “I really think of myself as being exactly what I seem to be. Nothing more and nothing less,” he says. Wells began his work as chairman of the arbitration panel in November 1998. He was joined by the tobacco company’s pick, Charles Renfrew, a retired federal district court judge from San Francisco who had served as deputy attorney general in the Carter administration. Renfrew declined to be interviewed. The plaintiff’s choice varied from hearing to hearing. But in most cases it was Harry Huge (pronounced Hu-gee), until recently a partner in the Washington, D.C., office of Powell, Goldstein, Frazer & Murphy. Huge is not a conventional corporate defense lawyer. This summer he left Powell Goldstein to start his own firm, teaming with Ness Motley on a $1 trillion suit on behalf of victims of the Sept. 11 terror attacks. Huge has another Ness Motley connection: His son is a lawyer there. Huge did not respond to requests for an interview. The panel’s first task was rewarding the attorneys who represented Mississippi, Texas and Florida. These states had settled with tobacco in 1997 and early 1998, before the MSA was signed, for $34.7 billion, to be paid over 25 years. No one denied that these were pioneers. Led by Mississippi attorney general Michael Moore, who filed the first state suit against the industry in 1994 with the help of Ness Motley and Pascagoula, Miss., attorney Richard Scruggs, these states kick-started the states’ assault on tobacco. (Minnesota was also an early crusader. It was the second state to file, and settled with the industry in the midst of trial. Its lawyers, led by Minneapolis’ Robins, Kaplan, Miller & Ciresi, didn’t arbitrate their fee, instead negotiating with the industry for $450 million paid over two years.) Within a month of their first hearing, the panel issued its decisions. In Mississippi, where the attorneys did not have a contingency fee contract, the lawyers received $1.4 billion, for a 34 percent fee. The Florida lawyers won $3.4 billion — the same amount they would have received under their 25 percent contract with the state. In Texas, where the plaintiff’s team had a 15 percent contract, the panel gave them more — 19 percent, for a fee of $3.3 billion. Wells’ acquaintances Umphrey and Reaud head two of the five firms in Texas that received the bounty. “These are landmark cases with important public health benefits involving the largest civil settlement in history,” the majority explained. As in each arbitration to follow, the panelists did not decide how awards were divided up; the plaintiffs’ lawyers hashed that out amongst themselves. The awards stunned nearly everyone involved in the tobacco cases. With these first three awards, the panel had already blasted far past the amount that the industry thought would be awarded throughout the entire arbitration process. A dissenting Renfrew called the $8 billion in fees “incomprehensible.” Even some plaintiffs’ lawyers were shocked. “We were absolutely astonished — beyond astonishment — at the awards to the first three states,” says one prominent plaintiffs’ lawyer who represented other states. Because of the $500 million annual cap, lawyers for other states would have to request astronomical sums to get a significant slice of each year’s award. The stakes had been raised to an entirely different level. HOW THE HEARINGS ‘WORKED’ Over the next three years, the arbitration panel considered fee requests from counsel for 15 other states or government entities. Joe Rice frequently took the lead for the plaintiffs in these hearings. During the first seven arbitrations the industry was represented by Jones, Day, Reavis & Pogue. In early 2000 McDermott, Will & Emery took over the assignment. The hearings began to follow a pattern. The plaintiffs presented Wells with a parade of legal and political celebrities, even if they played little or no role in the tobacco litigation. In most states, a chorus of retired federal and state judges recommended hefty fees. In Michigan former “60 Minutes” producer Lowell Bergman appeared, even though he had nothing to do with the Michigan case. To make sure the point wasn’t lost on Wells, the plaintiffs’ lawyers projected a glossy picture of Al Pacino playing Bergman in the movie “The Insider.” As is common in litigation, many of these “experts” were compensated. In the arbitration for the cities and counties of California, former state appellate judge John Trotter disclosed that the plaintiffs’ lawyers were paying him $6,000 a day for the three-day hearing. Trotter, who now works as an arbitrator, says that that’s his normal fee. (The state of California did not hire outside counsel, but various cities and counties did.) Current and former attorneys general, and their staffs, also urged the panel to shower the lawyers with huge awards. Their testimony was not selfless. If the lawyers weren’t happy with their arbitration award, they could try to enforce their contract with the state. By helping the lawyers get a big fee, the attorney generals lessened the likelihood that the plaintiffs’ lawyers would go after them. (In two states, Massachusetts and Illinois, where the plaintiffs’ lawyers got $775 million and $121 million, respectively, those lawyers have sued to enforce their contracts.) “They had the AGs over a barrel,” says one former attorney general. “The AGs had to support them.” The lawyers who came before the panel had different records. Some risked relatively little, waiting to jump into the fray until a settlement looked likely. But in most cases the rhetoric had a familiar ring. Many lawyers claimed to be “pioneers,” and scores of lawyers took credit for key accomplishments. Nearly everyone, for example, claimed responsibility for eliminating billboards for tobacco products. The industry tried to insert some perspective, often to no avail. “We thought, across the board, the awards were unreasonably large and bore no real relationship to the records being put forth before the panel,” says Jeffrey Stone, a McDermott Will partner who was the industry’s lead lawyer in most of the arbitrations and who argued the successful Castano fee challenge. In their decisions Wells and Huge rarely explained how they calculated their awards. That was admittedly a hard task, laden with lots of variables. The panel couldn’t just look at a state’s recovery as a gauge of its lawyers’ efforts. The $246 billion was parceled out among states according to the level of their Medicaid payments. But those payments might not bear any relation to the efforts of a state’s outside counsel. Not all states played an equal role in the tobacco litigation. Oklahoma, a small state, made significant contributions. The District of Columbia had jumped on the bandwagon late, when a settlement looked likely. Still, the panel’s decisions lack a consistent, logical rationale. Take Illinois, Ohio and Michigan. These three states, all roughly the same size in population, didn’t make much progress in their litigation before the MSA was signed. In each state the outside lawyers reported similar hours, 15,000-20,000. Illinois’ lawyers received $121 million, Ohio’s $265 million, and Michigan’s $450 million. A unanimous panel explained the relatively “modest” award for Illinois by pointing out that there was little activity in the state’s suit. In Ohio, where the lawyers got more than twice as much, a dissenting Renfrew objected that the legal work was “virtually indistinguishable from [that in] Illinois.” Wells and Huge noted that Ohio carried special clout because it was a large Republican state, and noted favorably the efforts of Ohio’s attorney general. (They don’t explain why outside lawyers should get credit for such things.) An exasperated Renfrew wrote: “I know of no legal authority that [says that] a high level of skills and talents of a client entitles counsel to a larger fee.” The panel had even caught Ohio counsel in some embarrassing deceptions. Among other things, the outside lawyers had submitted as an exhibit a video they had craftily edited to purportedly show other attorneys general praising Ohio’s counsel, when in fact they weren’t. Wells and Huge chastised the lawyers in their decision: “The art and bounds of advocacy do not include misrepresentation of the facts, misleading editing of video testimony of witnesses, overstating the importance of solid accomplishments, and failing to reveal actual conflicts or potential conflicts of expert witnesses.” But it doesn’t appear from the decision that Wells and Huge shaved anything off their award. “I am concerned,” wrote Renfrew in his dissent. “Despite their criticism of such conduct, the panel’s decision, in effect, rewards rather than discourages such advocacy.” (The arbitrators don’t identify the offending lawyers responsible for the videos.) Michigan’s award, the biggest of the three, worked out to $22,500 an hour for Ness Motley and the Scruggs firm. (This was one of the few states where these law firms didn’t have to share their fee with other firms.) Wells and Huge conceded that the lawyers’ work on the Michigan case was “modest.” But, they stressed, the state provided critical litigation mass to the national effort. Wells and Huge did not explain how adding to the “mass” was connected to effective lawyering. Wells and Huge also argued that the firms should get substantial credit for their lead work on the MSA negotiations. Wells gave these lawyers credit for this same national-level work in a dozen arbitrations. Calling the award grossly excessive, Renfrew argued that counsel for Michigan, a state that relied primarily on its attorney general’s staff, should have received less, not more, than Ohio and Illinois. He also complained that Ness Motley and Scruggs had already been richly compensated for their MSA negotiating efforts in other arbitrations. To defend the sheer size of their awards, Wells and Huge trotted out sport stars for comparison. Look at the Texas Rangers’ Alex Rodriguez, they wrote in their New York decision. He makes $51,403 an hour (based solely on his playing time for a three-hour game). So if the New York lawyers walked away with $13,000 per hour of work, that’s really quite reasonable, given their contributions to the nation’s health. “Great shortstops,” said the majority about Rodriguez and Derek Jeter ($35,000 an hour), “but the health benefits and financial benefits to a state and a nation are hard to discern in their superb play.” CATERING TO WELLS During these hearings, the two sides consulted extensively with their chosen, nonneutral panelist�before, during, and after the hearings. Much of the advice centered on how to impress Wells. “The most specific advice I got was that we needed to butter Wells up,” says an industry witness. “There was a tremendous amount of pandering [to Wells],” says another participant. The Oklahoma team, for example, highlighted the hunting credentials of one of its members. (Wells is an avid hunter.) “When they did the introductions, they said, ‘He’s the proud owner of so many bird dogs,’ ” this person recalls. “ Then they put a picture up on the screen of the guy sitting around with his bird dogs in a truck. Anybody else would say, ‘Excuse me! What are we doing here?’” The Oklahoma lawyers received $250 million in a unanimous decision. Few, if any, rules governed these arbitrations. “The process was not judicial. There were no rules of evidence, no hearsay rules,” says one former lawyer from an attorney general’s office. (Most arbitrators don’t impose courtroom rules of evidence, although they will put some limits on testimony.) And no one was under oath. “We were told, ‘Wells doesn’t feel people need to be under oath,’” says one industry lawyer. At one point, before a particularly contentious arbitration, the tobacco companies asked that all witnesses be sworn, as they are for most arbitrations. The plaintiffs’ lawyers agreed. But the panel refused. Wells says decisions about procedure were made unanimously by the panelists. These arbitrations have hardly been a hardship assignment for Wells and the other panelists. They’ve flown first-class to the hearings and stayed in luxury hotels. Locations weren’t necessarily chosen for their convenience to the parties. For the California arbitration, according to two sources, Wells insisted on a site above 6,000 feet. He wanted to get acclimated to thin air to ready himself for an elk hunting expedition. The hearing was held in Snow Bird, Utah, elevation 8,000 feet. “People were throwing up,” recalls one participant about the effects of the lofty elevation. Wells says the location was chosen for its proximity to California and because it was cost efficient. In his interview with The American Lawyer, Wells assessed his tenure as chairman and said he’s been “very comfortable” in this role. “It’s not as if I have no history in this arena,” he said, alluding to his work in dispute resolution as a labor mediator. “The fact that I’m not a lawyer I think has been an asset and not a liability. I found I often have a fresh perspective. … I’m not encumbered by a traditional arbitration background.” He continued, “The truth of the matter is, most of this is practical knowledge. It’s common sense.” When told of criticism that he doesn’t understand the nuances of complex litigation, Wells at first shrugged it off and said, “Fine.” Then he quickly added, “If you look at stuff I’ve done [before this], it’s been fairly complex,” mentioning difficult labor negotiations he oversaw at the FMCS, including the prolonged Caterpillar-United Auto Workers battle in the late 1990s. “I would challenge anybody to find more complex cases than I’ve been privileged to handle,” he concluded. “I think my record speaks for itself.” It does indeed. Related chart: And the Winners Are …

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