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In the eyes of some U.S. senators, ex-televangelists Jim and Tammy Faye Bakker and tobacco-busting lawyers share a common offense: They violated a fiduciary duty and unjustly enriched themselves. That is why Arizona Republican Sen. Jon Kyl and his Texas colleague, John Cornyn, asked the Senate to apply a tax code provision drafted after the collapse of the Bakker empire to limit contingency fees earned by lawyers in suits resulting in settlements or judgments of $100 million or more. Kyl offered his proposal during debate on tax-cut legislation. He called it “the tobacco-tax lawyers’ amendment.” That bid failed last week, but the idea is still very much alive. The Association of Trial Lawyers of America called the proposal “outrageous, unprecedented and unconstitutional.” The pro-business Washington Legal Foundation called it “logical and necessary.” The Senate, after some members voiced opposition to involving the Internal Revenue Service in setting lawyers’ fees, on Thursday rejected the proposal, 61-37. Kyl has vowed to press it in a bill that he and Cornyn introduced last month, S. 887. An identical bill has been introduced in the House. Kyl’s was one of two efforts launched in the last two weeks to limit contingency fees. A group has filed petitions in 12 state supreme courts proposing to reduce contingency fees charged by lawyers in “early offer” settlements in personal injury cases. A key thinker behind both is Michael Horowitz, director of the conservative Hudson Institute’s Project for Civil Justice Reform. “To me, the tobacco fees are the scandal that rivals Teapot Dome,” said Horowitz. If the Kyl proposal fails this year, he said, “It’s going to be around next year and the year after and the year after. Eventually, it is going to happen.” For lawyers in $100 million-plus cases, the Kyl proposal would allow fees up to 500 percent of reasonable hourly rates where, for example, the case involved a substantial risk of non-recovery of fees or the lawyer provided exceptional services that improved the plaintiff’s recovery. It would impose a 5 percent excise tax on amounts above those fees, and an additional 200 percent tax if the excess amount is not returned to the client. The proposal applies not just to tobacco fees but fees for judgments or settlements on behalf of tax-exempt entities and single individuals in state or federal courts. It would aggregate individual claims brought separately against a common defendant. Tobacco lawyers are getting fees of about $500 million a year, said Kyl. “Some attorneys are receiving fees, if we can believe this now, in excess of $150,000 an hour,” he said. “It is unconscionable, and no contract that provides for that can be enforceable in law. It is clearly a breach of the fiduciary responsibility” to the client. Under his proposal, Kyl said, lawyers who worked on the 1998 $200 billion tobacco settlement would receive “a more-than-generous $2,500 per hour” rate. States would get about $9 billion. “Lawyers are not simply sharp business entrepreneur practitioners,” said Paul Kamenar of the conservative Washington Legal Foundation. “They do indeed have fiduciary duties not to charge unreasonable or excessive attorney fees.” INTERSTATE IMPACT The $100 million figure was chosen because that amount generally is viewed as having an impact on interstate commerce, a trigger for federal involvement, Horowitz said. “Why should lawyers in cases with significant impact on interstate commerce be any more protected than pension fund trustees or foundation officials?” he asked. Alan Morrison of Public Citizen Litigation Group said the proposal’s backers hope to deprive the Democratic Party of the financial support of trial lawyers. “And companies understand [that] the trial lawyers are the engines by which victims get back against companies,” he said. “It’s perfectly understandable you would try to disarm your enemy.” Robert Levy of the libertarian Cato Institute said, “I don’t buy this fiduciary stuff, not because lawyers aren’t fiduciaries. I don’t want the government setting wage controls for all these various professions.” Conservatives, said Levy, rail against using the tax code for social engineering. “What the heck is this but using the tax code for social engineering?” he asked. The proposal’s only positive feature, Levy said, is its emphasis on enforcing fiduciary duties: “You have lawyers who subscribe to those rules in a number of states and they ought to be enforced, but enforced by the states, not Congress.” Plaintiffs’ lawyer Ron Motley of Mt. Pleasant, S.C.’s Ness Motley has run a newspaper ad featuring families of Sept. 11 victims saying that cases such as their attempt to bankrupt terrorists would not be taken by lawyers under fee constraints contained in the Kyl proposal. But Horowitz said, “We’re talking about a five-times multiplier for fee levels. Most federal courts use a three-times multiplier for fees in tough cases.” Regulating legal fees traditionally is a state, not a federal, function, said ethics scholar Stephen Gillers, vice dean of New York University School of Law. If the system has over-rewarded tobacco lawyers, he said, it is because the compensation system for victims hasn’t worked well. Of the proposal, he said, “I don’t see it as Congress being the gallant hero coming to the defense of injured smokers who Congress has otherwise ignored at the expense of the enriched lawyers. Rather, it’s an effort to redistribute wealth between lawyers who won the cases and tobacco companies whose behavior is seriously deserving of criticism.”

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