P.L.A. - A Journal of Politics, Law and Autism

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Thursday, March 13, 2003
Economic News

The news on the economic front was not good today. As a link from Atrios tells us, the labor market continues to deteriorate:
The Labor Department said the number of Americans filing new claims for unemployment benefits fell to 420,000 in the week ended March 8 from a revised 435,000 the prior week. Economists, on average, expected 419,000 new claims, according to a Reuters poll.

Any number above 400,000 is generally considered to indicate a deteriorating labor market.

Retails sales for February were also quite soft. The New York Times reports:
The latest snapshot of retail activity released by the Commerce Department Thursday added to fears the economy could slide back into a new recession, economists said.

Retail sales fell 1.6 percent from the previous month, with weakness widespread. Building and garden supply stores posted a record drop.

``You have to be living in a cave not to feel spooked and anxious,'' said Bill Cheney, chief economist at John Hancock. ``Losing your job or having to pay twice as much for gas makes a dent in what people will spend on other things.''

February's performance was weaker than analysts expected and marked a big pullback by consumers from January, when sales rose by 0.3 percent.

Third, oil futures hit a multi-year high today. The Times again:
Crude oil futures closed at a 12-year high yesterday, for the third time in the last two weeks, after the Energy Department reported an unexpected decline in inventories.

Supplies of crude oil last week fell 1.4 percent, to 269.8 million barrels, the department said. Inventories were 16 percent lower than they were a year earlier and close to a 28-year low. Analysts had expected an increase. The decline came as the United States appears headed for a war in Iraq, which pumps about 3 percent of the world's oil.

This is a big problem," said John Kilduff, senior vice president for energy-risk management at Fimat USA in New York. "You don't want to have low oil inventories when the country is about to go to war."

Crude oil for April delivery rose $1.11, or 3 percent, to $37.83 a barrel on the New York Mercantile Exchange, registering the highest closing price since Oct. 16, 1990, when the Iraqi occupation of Kuwait cut off exports from both countries.

The administration is apparently hoping that a resolution of the Iraq situation will provide some stability to the economy by removing a large element of uncertainty. Lets hope they are right and that the impending war does not cause oil prices to skyrocket.

No Pricing Power

Doctors are outraged at the rise in premiums for medical malpractice insurance. That outrage has led to walk outs, “strikes” and demands that Congress pass legislation to make sure that many victims of medical negligence not be fully compensated.

How much have malpractice insurance premiums increased? According to this USA Today story:
Doctors complain that malpractice insurance premiums have soared nationwide since the 1990s, when they remained flat or dropped. Government data released Monday by a congressional advisory commission show the average increase last year was 11.3%. That was the largest increase in a decade, yet lower than the average annual increase of 11.6% since 1975, according to a report this month by Tillinghast-Towers Perrin, which provides consulting services to the insurance industry.

If the increase in premiums is lower than the twenty-five year average, what is causing the outrage now?

There may be a number of answers to that question. One answer is that although last year’s increase was below the 25 year average, it was the highest in a decade and came as somewhat of a shock to Doctors.

We think a large part of the answer, however, lies in the rise of managed care. In the 1970s, and 1980s large increases in medical malpractice premiums were in the context of fee for service medicine. The fee for service payment system allowed Doctors to pass the increased costs of the premiums along to the companies insuring the patients. Neither the Doctors nor the patients felt the pinch of the increased costs.

The rise of managed care changed all that. Doctors no longer have pricing power for their services. The HMOs, Medicaid and other large organizations pay for such a large portion of medical costs that they have market power over the prices Doctors can charge.
They do not care what the Doctors’ costs are. The amounts they will pay for medical services are fixed by market forces. When the Doctor’s costs go up, he or she can no longer pass the cost along and must either work harder, cut other expenses or make less money.

Many Doctors are unhappy with any of those options. They have no easy way to cope with the situation. While Doctors as a whole are paying about 3.2% of their revenue for malpractice coverage, that money comes directly off the bottom line.

When Doctors pay just 3.2% of their revenue for malpractice insurance, it is hard to think that those costs are driving lots of Doctors from the practice of medicine (although it could be true in isolated localities for certain specialties). What the Doctors are feeling is the squeeze of the market due to the rise of managed care.

If a trucking company's costs go up because of an increase in the price of fuel, should it be insulated from liability for injuries caused by the negligence of their drivers? In the end, Doctors will have to learn to live with the discipline of the market. A cap on non-economic damages will not change that.

Wednesday, March 12, 2003
Two Masters

Matthew 6:24 tells us that:
No one can serve two masters; for either he will hate the one and love the other, or he will be devoted to the one and despise the other.

Nowhere is that admonition more applicable than in the practice of law. A lawyer owes a fiduciary duty to his or her client. Within the bounds of the law, a lawyer must put the interests of the client above his or own financial or personal interests.

One of the reasons that the public holds lawyers in low esteem is the perception that lawyers place their own financial interests above those of the clients. Lawyers who perpetuate that perception do damage not only to their clients but also to the profession as a whole.

The scripture quoted above was brought to mind by this story in the New York Times.

ABB is a Swiss conglomerate. Among other things, it owns Combustion Engineering. Combustion Engineering used to use boilers lined with asbestos. The use of asbestos in boilers caused many people to be exposed to the carcinogen.

More than 220,000 people brought suit against Combustion Engineering for exposure to asbestos. Among the lawyers bringing such claims was Joseph F. Rice of the South Carolina firm of Ness, Motley.

Mr. Rice is a big time class action lawyer. He was a major player in the tobacco litigation and he is a major player in the asbestos litigation against CE. In addition to representing clients with asbestos claims against CE, Mr. Rice also consults with other plaintiff’s attorneys bringing such claims. As the Times reports:
Claimants typically pay a contingency fee to lawyers like Mr. Rice, a fee that generally ranges from 25 to 40 percent of the total. In addition, Mr. Rice has consulting arrangements with other law firms under which he receives a portion of the fees that they bill their clients in exchange for his work on their cases.

Thus, Mr. Rice is being paid not only by his clients but also by the clients of many other persons suing Combustion Engineering.

ABB wanted to settle all of the asbestos litigation against CE. It made a settlement proposal that would have prevented any more suits against CE.

The Times reports:
Under the settlement, people who develop asbestos-related disease because of their exposure to the boilers will receive a fixed payout from a trust being created by the companies. They will not be allowed to sue ABB or Combustion Engineering.

If the trust is overwhelmed with claims, as expected, people badly injured by asbestos — representing a small fraction of the claimants — may receive less money than if they could pursue their cases in court, lawyers for those plaintiffs say. But the trust will pay lightly injured plaintiffs quickly, producing a windfall for a handful of lawyers who represent thousands of those claimants.

The settlement cannot be finalized without the approval of the claimants. The Times:
For the deal to be passed, more than 75 percent of all claimants must vote in favor of it, and the bankruptcy judge overseeing the case must approve the agreement. "We believe that we have more than adequate votes for its approval," Mr. Brett (General Counsel for ABB) said.

Obtaining the approval of the settlement was very important to ABB. In fact, it was so important that they hired a broker to convince the plaintiffs to accept the deal. ABB agreed to pay the broker a fee of $20 million, about 7% of the total cash ABB is putting into the settlement for such services. Please note that the payment of that $20 million fee reduced the available cash for the victims of asbestos exposure by the same amount.

Where could ABB find a person with enough knowledge, credibility and skill to secure the votes necessary to gain approval of the settlement?

In complete disregard to the teachings of the Book of Matthew above, Joseph Rice, one of the lawyers suing CE, agreed to broker the deal for ABB.

That is right, one of the lawyers for the plaintiffs in asbestos litigation against Combustion Engineering agreed to accept a $20 million fee from the parent corporation of the defendant in return for convincing the plaintiffs to accept the offer of settlement.

We were stunned to read that. It is hard to believe that ABB would offer to allow a plaintiff’s attorney to be their broker. It is harder to believe that Mr. Rice would accept such a role. It is harder still to believe that the ethics of the legal profession would permit such a conflict of interest. It is impossible to believe that such an arrangement is good for the profession of law.

ABB defends it arrangement with Mr. Rice:
David Bernick, outside counsel for ABB, said he considered Mr. Rice's fee for brokering the settlement reasonable. Mr. Rice worked hard to negotiate the deal, which was completed in a matter of months last fall, with ABB and Combustion Engineering on the verge of bankruptcy.

Mr. Rice played a crucial role in explaining the agreement to other plaintiffs' lawyers and winning them over, Mr. Bernick said.
“Why shouldn't he get paid for brokering a deal?" Mr. Bernick said.

The reason is actually quite simple. Mr. Rice had a duty to his clients to ensure that they achieved the best result possible in the litigation. By agreeing to take $20 million from the other side of the litigation to convince plaintiffs to accept the settlement, Mr. Rice had a large interest making sure that the plaintiffs accepted regardless of whether or not the deal was in their best interests.

If the proposed settlement was in his clients best interests, Mr. Rice had a preexisting duty to do everything he could to implement the deal. If the deal was not in his client’s best interests, he should oppose the deal regardless of the financial cost to himself. Taking money from both sides of the transaction is simply wrong.

Mr. Rice defends his conduct:
He does not see a conflict because his $20 million fee, a portion of which he said he had already received, was coming from ABB, which owns all of Combustion Engineering, rather than Combustion Engineering itself.

"I'm not taking the fee from anybody that I'm suing," he said in a phone interview yesterday. "I did a business transaction." In addition, Mr. Rice said he and his firm did not advise any clients on whether to vote in favor of the agreement, which was approved by outside experts including lawyers representing future claimants against Combustion Engineering.

"The agreement was good for both sides," Mr. Rice said. ABB "had its independent problems that needed to get solved, and in solving their problems my asbestos clients came out ahead of the game."

First, the fact that the money was coming from ABB and not CE is irrelevant in that CE is a wholly owned subsidiary of ABB. If ABB was not financially interested in protecting CE’s interest, what was it doing paying $20 million to Mr. Rice?

Mr. Rice’s contention that he did not advise his clients whether or not to take the deal is not exculpatory. When those clients hired Mr. Rice, one of the services they could expect was his counsel on matters of settlement. In essence, failing to advise his clients is a breach of his fiduciary duty to them.

The responsible thing for Mr. Rice to do would have been to counsel his clients as to whether or not to take the deal. If he thought it was a good deal, he should have not only counseled them to take it, he should have worked to convince others to accept to deal so as to promote his client’s interests. That is what lawyers do to earn their fee paid by their client. His fee from his clients is the only appropriate compensation for his work to secure the deal. He should not require a $20 million pay off from the defendants to induce him to zealously represent his own clients.

Similarly, Mr. Rice’s argument that the settlement was in the best interests of his clients is irrelevant. If so, he had a duty to pursue it without taking $20 million from the other side. If not, he had a duty to oppose it regardless of his own financial loss.

The Times story also quotes the ethics counsel for the American Bar Association:
George Kuhlman, ethics counsel for the American Bar Association, said the group did not have absolute rules that bar lawyers from being paid by both sides in a case. "We have very complex rules on lawyers and conflicts of interest," Mr. Kuhlman said. "There are things that you are supposed to avoid, but it does not boil down to that you are supposed to avoid a fee from someone you are otherwise suing."

That is an indictment of the ABA rules. The rules need not be complex. A lawyer representing a client in litigation simply should not take money from the other side to implement a settlement. Period. That is really not hard to understand and does not require a complex set of rules. Taking money from both sides of litigation results in the lawyer serving two masters, thereby being "devoted to the one and despis(ing) the other."

Lawyers like Mr. Rice cause us to weep for the profession we love. When a lawyer tries to serve two masters at the same time, he is really only serving himself. That is contrary to the fiduciary relationship between a lawyer and a client. Regardless of what the ABA determines in the context of its overly complicated rules, we think lawyers like Mr. Rice are a disgrace.

The Answer is “Yes”

Mickey Kaus has been reading Paul Krugman again. Kaus notes that Krugman has argued that the economy risks falling into a deflationary spiral. In a recent column, Krugman argued that the we might have rapid inflation as a way of handing the national debt. Kaus writes:
I'm confused. It seems like only two months ago he had me terrified that inflation was going to go down so low it would plunge into negative territory, as in Japan. Now, after reading today's column, I'm worried that the government will decide to "inflate away debt" and "interest rates will soar."

In essence, Kaus is asking, “should we be worried about inflation or deflation?”

Bred DeLong says that the answer is “Yes.”

Tuesday, March 11, 2003
The Day The Earth Stood Still and Ronald Wilson Reagan

Recently Hesiod remarked that our Iraq policy was similar to the message of the 1951 science fiction movie The Day the Earth Stood Still.

Hesiod’s reference to that movie called to mind the Presidency of Ronald Wilson Reagan.

The Day The Earth Stood Still tells the story of an alien being who comes to earth with a message of peace. The alien is from a highly advanced society that has turned peacekeeping responsibility over to an interplanetary force of robots. The robots are programmed to destroy any nation that resorts to war.

The aliens are concerned that earth might bring nuclear weapons to the galaxy. The alien is sent to earth to urge all nations to work together for peace and to warn that if they do not do so, the robots will destroy the earth.

Why would that movie remind us of President Reagan? President Reagan was a huge fan of science fiction movies. Sometimes those movies, including The Day the Earth Stood Still, influenced his actions as President.

For instance, the theme of The Day the Earth Stood Still was on display at a 1985 meeting between Reagan and Gorbachev. Lou Cannon, in his biography of Reagan, The Role of a Lifetime, reports as follows:
In Hollywood he became an avid science-fiction fan, absorbed with a favorite theme of the genre: the invasion from outer space that prompts earthlings to put aside nationalistic quarrels and band together against an alien invader.

Reagan liked this idea so much that he tried it out on Gorbachev in their first meeting at Geneva in 1985, saying that he was certain the United States and the Soviet Union would cooperate if earth were threatened by an invasion from outer space. Reagan’s idea was not part of the script, and it startled his advisors.

It may have also startled Gorbachev, who did not have at his fingertips the Marxist-Leninist position on the propriety of cooperating with the imperialists against an interplanetary invasion. In any event, Gorbachev changed the subject…

(Colin) Powell… knew more than he ever wanted to know about Reagan’s preoccupation with what Powell called “the little green men” and he struggled diligently to keep interplanetary references out of Reagan’s speeches. Powell was convinced that Reagan’s unique proposal to Gorbachev had been inspired by a 1951 science-fiction film, The Day The Earth Stood Still

The experience in Geneva with Gorbachev did not quench Reagan’s fascination with the theme of uniting the earth as a result of alien invasion. In 1987, he gave a speech to the General Assembly of the United Nations. In that speech, Reagan said, it part:
In our obsession with antagonisms of the moment, we often forget how much unites all the members of humanity. Perhaps we need some outside, universal threat to make us recognize this common bond. I occasionally think how quickly our differences worldwide would vanish if we were facing an alien threat from outside this world.

That is why when we read a reference to The Day The Earth Stood Still, we think of Ronald Wilson Reagan.

The Uninsured

Ross at The Bloviator is devoting theentire week to a discussion of the large number of Americans who do not have health insurance coverage. Today's entry deals with the amount of care provided without payment either from the patient or from an insurance company.

Ross pegs the amount of uncompensated care at $35 billion. Who pays for such care? We all do, eitherthrough higher premiums, higher taxes or both.

The entire series is excellent. Please visit the Bloviator, start at the top and just keep reading.

Monday, March 10, 2003
Celebrity Children’s Books

While listening to NPR over the weekend, we heard that Madonna had signed a contract to write five children’s books. It appears that the story is true. In fact Madonna has already written five children's books and has a contract for the books to be published in both North America and the U.K.

Given that Madonna’s previous book was entitled Sex, you may insert your own joke here.

We were also surprised to find that a lot of celebrities have written books for children. For instance, Amazon lists children's books by among others, Jimmy Buffett, Pete Seeger, Katie Kouric, Jamie Lee Curtis, Bill Cosby, Dom Deluise, Jerry Garcia, Maria Shriver, and LL Kool J.

We expect that many serious authors of children’s books are gnashing their teeth over the celebrities getting publishing contracts to pen children’s books. In a very large way, it demeans the work of the authors who have dedicated their lives to learning the art of writing for kids.

It is also true that the transfer between entertainment and writing is a one-way street. We have not heard that Shel Silverstein has a contract for five popular music CDs and is about to embark on a world tour.

We generally oppose the notion that a person’s success in one field makes him or her an authority in a completely separate field. We simply do not care what Sean Penn thinks about the war, whether Princess Diana was for the landmine treaty, whether Tiger Woods is in favor of a female member at Augusta or what Charles Barkley thinks about anything.

We refer to the notion that success in one field provides expertise in another field as “excellence transference.” Some years ago, we represented a Doctor in litigation having nothing to do with the practice of medicine. The Doctor was quite smart but had no experience in litigation.

During the suit, he insisted that we take a certain action that we knew would backfire. The Doctor, becoming exacerbated at our refusal to take the action he preferred, finally yelled at us that he was the client, we were his lawyer and he was instructing us to do as he said.

Despite the fact that neither litigation skills nor the interpretation of insurance contracts is taught medical school, the Doctor was sure that he knew how to run a suit better than we did. The Doctor was the victim of excellence transference.

We have no desire to buy a children’s book by Maria Shriver, Katie Kuric, Dom Deluise or Jamie Lee Curtis. That said, we think that the songwriters on the list of celebrities may be in a different position.

The core of a good children’s book is rhythm and rhyme. The use of rhythm and rhyme is also central to the composition of popular music. Given what we know about Madonna, however, we would pass on her children’s books.

Now, we freely admit that we do not know the difference between LL Kool J and Grape Kool Aide and therefore have no opinion concerning either his music or his book.

We might try a children’s book by Jimmy Buffett or Pete Seeger. What about the personification of the 60’s, Jerry Garcia? We think he is the pick of the litter with regard to celebrity children’s books. Not only do we like his music (we are listening to one of his bluegrass CD’s as we write this), he has also put out a children’s CD, Not For Kids Only (with David Grisman) that is a classic.