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Posted on 03/27/2003 5:40:04 AM PST by Liz

A New York judge is challenging the lawyers' fees in the five-year-old settlement by tobacco companies with the states, casting some doubt on the settlement even as states make plans to use the billions of dollars that they have been pledged.

The dispute may become intensely political in New York where legislative leaders are hoping to sell some bonds backed by New York's share of the settlement — $25.5 billion — to help narrow the state's budget deficit. Questioning any aspect of the settlement, which resolved claims by the states for costs of health care for those suffering from smoking-related illnesses, could make the bonds less attractive to investors.

The New York justice, Charles E. Ramos of State Supreme Court in Manhattan, called the fees "potentially excessive and therefore unethical" in court documents this fall and in January.

The tobacco companies agreed to pay $625 million to lawyers representing New York, a bill that has been tabulated as $13,000 an hour by a member of the arbitration panel that approved the fee. Justice Ramos questioned whether some of the $625 million should have gone to New York.

Justice Ramos did not explicitly raise the concern that the lawyers for the states were paid to settle easily. He also did not directly challenge the $205 billion nationwide settlement, which is more than three-quarters of the $246 billion over all that tobacco companies have agreed to pay the states. But he implied that the tobacco did not appear to have fought the lawyers' fee requests very hard — something that the tobacco companies disputed.

The New York attorney general, Eliot Spitzer, has declined to pursue the fees and has formed an unlikely alliance with New York's outside lawyers and the tobacco companies to argue that Justice Ramos, who inherited the tobacco litigation after the settlement was agreed upon, does not have the authority to review the matter. Finding that no one involved in the settlement would pursue the question of the fees, the judge in January appointed two independent lawyers to represent New York. Mr. Spitzer, the tobacco companies and the outside lawyers are all appealing the judge's action.

"It is a very bizarre proceeding," said Samuel Issacharoff, a Columbia University law professor who is representing the out-of-state law firms that represented New York. "The appellants are everybody. The lawyers are appealing; the state is appealing; the tobacco companies are appealing."

For Justice Ramos, the problem has been that $625 million is a lot of money to pay lawyers, even when the settlement totals some $25 billion (the lawyers initially requested $1.25 billion to $1.75 billion, according to court documents).

"A legal fee must pass the test of reasonableness," Justice Ramos wrote in October. "A fee of this magnitude probes the limits of propriety and requires the courts to rule whether the practice of law, which bars attorneys from accepting unreasonable or illegal fees, will permit counsel to enjoy such a windfall."

Under the terms of the global settlement, legal fees would be paid by the tobacco companies and would be treated separately from the money for the settling states. When the tobacco companies and the outside lawyers could not agree on a dollar amount, a three-member arbitration panel was appointed to determine the fee; the panel set the compensation for the groups of law firms that represented different states. New York was represented by six law firms, three from other states.

The members of the arbitration panel were Harry Huge, a Washington lawyer picked by the lawyers representing plaintiffs; Charles Renfrew, a former federal judge selected by the tobacco companies; and John Calhoun Wells, picked as the independent panelist. Mr. Wells and Mr. Huge supported the $625 million fee (and indeed supported similar fees to lawyers who represented other states), while Mr. Renfrew criticized it as excessive.

The $625 million fee, Mr. Renfrew wrote in his dissent "represents over $13,000 per hour for every hour spent on the New York case by each lawyer, regardless of experience or skill."

"This is well over one half of the annual per capita income in the United States for the year 1999," he wrote. "To suggest that a fee of this size is necessary to motivate the bar is flatly wrong and, I believe an insult to the profession."

The other members of the arbitration panel said the $625 million fee was appropriate given the difficulty of the New York case and the speed at which the lawyers had prepared for trial.

In response to Mr. Renfrew's criticism, the other panel members compared the fees to other professional salaries — ranging from the baseball player Derek Jeter's $170 million, multiyear contract (which translates into about $26,000 an hour, they wrote) to the $5.1 million (about $12,700 an hour when stock options are included) paid to Geoffrey C. Bible, a former chief executive of . But given how much work the outside lawyers did, the large fees seem excessive, said Lester Brickman, a law professor at the Benjamin N. Cardozo School of Law at Yeshiva University in New York. (Mr. Brickman said he has testified on behalf of opponents of large fees paid for other states' settlements, but not in the New York case.)

The outside lawyers were not involved in the difficult, early stages of the lawsuit, Mr. Brickman said, and should not have been paid so much. "They came into the process very late," he said. "They copied work done by other people."

The possibility that tobacco companies did not resist the outside lawyers' proposed fees was rejected by Jeffrey E. Stone, a lawyer in the Chicago office of McDermott Will & Emery, which helped represent the tobacco companies. "We opposed the fee request made by outside counsel as vigorously and as forcefully as we could," Mr. Stone said, adding that the agreement governing the arbitration barred an appeal of the results. "We thought that the award that was granted was completely disproportionate to the work and the results achieved by the outside counsel in New York."

Generally, a fee is not unreasonable on its face, said Roger C. Cramton, a law professor at Cornell University. "All courts say that a fee has to be reasonable, and not excessive or unconscionable," he said. "But they also say where sophisticated parties made elaborate agreements after very great consideration," courts should be reluctant to interfere.

Fees may be higher if the lawyer took a more risky position, for example, he said. "A lot depends." It is the opposition of the attorney general's office to review of the fees that has drawn the most criticism. A spokesman for Mr. Spitzer, Darren Dopp, said that even if the outside lawyers were overpaid, the excess would be refunded to the tobacco companies and would not go to the states.

More important, Mr. Dopp said, any tinkering with the fee arrangement could result in tinkering with the overall settlement. That might undermine tobacco industry pledges to refrain from certain kinds of advertising, he said, and could hamper any efforts by New York to turn the settlement to its advantage.

"We argue against reopening it in part because disrupting it right now could have serious financial consequences," he said. "It would compound a fiscal problem facing local governments and the state."

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