WHEN HAROLD KOHN of Philadelphia asked a federal judge to let him charge his clients $610 an hour for helping coax a $50 million settlement out of the paper industry in an antitrust suit, even some of his legal colleagues were staggered. Kohn's co- lead counsel in the class-action price-fixing case, Granvil I. Specks of Chicago, protested to the court that Kohn did not deserve the $1 million in total fees he was seeking.
Kohn's request for $1 million, Specks said, was "so flagrantly excessive as to be scandalous." When he filed that strong statement in court, Specks was politic enough to neglect to remind the judge that his own fee request was already before his honor in the same case. Specks was asking for a total fee of $3.3 million, based on an hourly rate of $589.
With the help of this collegial spat, a legal case known as the Fine Paper Antitrust Litigation has opened a window on a subject that rarely meets public gaze: lawyers' avarice. Specks' complaint about Kohn's fee request was the opening volley of what soon became perhaps the bloodiest and most bizarre fee free-for-all in the annals of the nation's bar -- a dispute entirely among rival co-counsel (a mind-boggling 160 of them) that eventually produced a stack of documents 30 feet high, consumed 35 days of court hearings (this to set the fees in a case which never even went to trial), and laid bare some of the inner workings of a cutthroat, patronage-rife, highly lucrative, little-understood legal specialty which often rewards lawyers far more handsomely than the individual clients in whose names huge lawsuits are brought.
By the time the judge sorted through two years of dirty linen piled into the court record by co-counsel elbowing each other for slices of the settlement fund, he was ready to accept the metaphor offered in an affadavit by one of the lawyers, Stewart Perry of Minneapolis, who likened his colleagues to "sharks in a feeding frenzy."
(Perry presumably did not mean to refer to himself, but the judge was not amused by, nor did he allow, his request to receive compensation at the rate of $15 an hour for the time his teen-age son spent on the case, moving boxes of legal documents.)
In his ruling last month, U.S. District Judge Joseph L. McGlynn Jr. of Philadelphia gave crisp spankings all around. He slashed Kohn's fee request by 65 percent and Specks' by 87 percent. In all, the 160 lawyers on the plaintiffs' side had sought $20.3 million in fees out of the $50 million settlement; McGlynn awarded them barely a fifth of that -- $4.3 million.
"I regret to say my inquiry has given substance to the worst fears of the critics of the class action device -- that it is being manipulated by lawyers to generate fees," McGlynn wrote in his 473-page opinion.
The lawyers, acting on behalf of a class of 359,000 purchasers of stationery and other paper products, had sued 15 companies for conspiring to fix prices over a 13-year period, from 1964 to 1977. In their fee petitions, they claimed their work was especially meritorious because of the uncertainty of winning -- two federal grand juries looking into the same charges had returned no indictment.
The judge was not impressed. He found that lawyers had spent tens of thousands of "wasted hours on useless tasks," that there was "outright padding" of time records, and that the whole organization structure of the plaintiffs legal team was based "on patronage, not efficiency."
He singled out Specks for running the case "like a potentate, recruiting supporters and insuring their loyalty by dispensing favors at the expense of the class. The responsibity for the overstaffing, mismanagement and excessive charges must be at his feet."
Not surprisingly, the judge's fee decision has sent tremors through the high-risk, high- reward, faintly bucaneering community of plaintiffs' antitrust lawyers, clustered in Chicago, Philadelphia and San Franciso, that in the past two decades has been bringing these class-action suits with increasing success, then bickering over the spoils of victory with ever more venom.
Specks called the opinion an "act of judicial savagery," and plans an appeal. He said he took the leadership role in a high-risk, highly complex case and came away with a large settlement. "This is the way the antitrust laws are supposed to work," he said.
One of his principal allies in Fine Paper, James Sloan of Chicago, said the decision was based on "vicious and sandalous rumors, gossip and hearsay."
But other members of the plaintiffs antitrust bar, who did not participate in the case and who asked not to be identified, agreed with McGlynn that the lawyers "ran wild" in Fine Paper, although many also faulted the judge for not moving earlier to rein in their excesses. "It's nobody's fault but the courts," said one.
Still others saw the fee decision as a by- product of a larger campaign orchestrated by American industry -- which has been on the losing end of these big cases -- to strike at the heart of the whole class-action price-fixing device by reducing the financial incentives for the lawyers who bring them.
When the open warfare broke out within the Fine Paper plaintiffs' legal team, 15 prominent corporate class members with only a small financial interest in the case seized the opportunity to hire a New York firm, at a reported (though disputed) cost of $1 million, to conduct what amounted to a court-approved audit of the plaintiff lawyers' work.
"What we found was ugly," said Ira Millstein, a senior partner with the firm of Weil, Gotshal and Manges, whose audit filled up a 525-page report and 1,200 pages of appendices and exhibits, and formed the basis for much of McGlynn's decision. "This was the case where alllthe sins of the system were most manifest," he said.
Sloan calls Millstein a "twerp" and claims the whole purpose of his audit -- and the point of a heavily lobbied bill before Congress that would rewrite some of the key laws governing class-action price-fixing suits -- is to "destroy the effective enforcement of antitrust laws in this country."
Millstein, parting company with some of the hardliners in the defense antitrust bar, said he doesn't want to bring an end to such suits. The only motive behind his audit, he said, was a "cry for reform. . . . We simply can't afford to let the bar become a symbol of avarice."
The law has always been of two minds about avarice among lawyers. It abhors any overt display of fee-chasing, but it has built an elaborate web of civil procedures that depend on, and are designed to promote, lawyers' entrepreneurial instincts. Plaintiffs' class-action antitrust lawyers stand in the cross fire of that ambivalence. They are their profession's best-paid black sheep.
Establishment law firms, in particular, look down their noses at them; it's no accident that there isn't much of a plaintiffs' antitrust bar in power centers like New York and Washington, where there is more "respectable" money to be made defending corporations against these rough-hewn, roguish entrepreneurs.
The bill of particulars against them, as expresssed by their critics in the profession, is that they are a band of ambulance chasers who piggyback on federal enforcement actions, entice "straw clients" to bring boilerplate class-action suits against alleged price- fixers, then make use of a combination of laws and civil rules that stack the game heavily in their favor to whipsaw settlements from coporations, all the while letting their meters run wild and -- at fee time -- letting their greed run free.
"The spectacle of lawyers reaping enormous profits from lawsuits which do not benefit their clients must be a source of embarrassment to the judiciary and the bar," writes William Simon, a founding partner of Howrey and Simon, a leading defense antitrust firm in Washington.
Members of the plaintiffs' bar finds this depiction not only wrongheaded, but laced with irony. They see themselves filling the lofty role the Congress and courts have assigned to them -- the consumer's great bulwark against price-fixers. And they find complaints about the size of their fees, coming from the defense bar, to be laughable.
"If they ever put their hair down, defense lawyers will admit to you they make a helluva lot more money at losing these cases than plaintiffs' lawyers make at winning them," says David I. Shapiro, a Washington attorney who was one of the pioneers of the plaintiffs antitrust class-action suit, but who several years ago got out of what he now refers to as the "whore's game" because he wearied of the inside elbowing with his co-counsel.
Shapiro now is paid to defend corporations against such suits. "When you're on the defense side, you get paid up front," he said. "It's easier that way."
Adds one antitrust defense lawyer in Philadelphia, who asked not to be named: "We bitch about the plaintiffs' lawyers all the time, and what they do is outrageous, but the truth is, we all make a fortune off them."
What separates plaintiffs' lawyers from defense lawyers, far more than their clients or their pedigree, is their fee arrangements. Plaintiffs lawyers in class-action cases work on a contingent fee -- a populist invention designed to make litigation affordable to all.
It does this by holding out the promise of sizable rewards to lawyers willing to risk the possiblity of getting no fees if they lose the case. In big class-action cases that drag on for years, the risk can be substantial.
"All of us have big lines of credit," says Sloan, a solo practioner whose Chicago office has the slightly frayed, Runyonesque look of a private-eye movie set. "I've been hundreds of thousands of dollars in the hole in cases. . . . It takes a strong stomach."
As a reward for risk, plaintiff's lawyers who win class action cases are permitted to ask the judge to apply "multipliers" of two, three, four, even five to their standard hourly rates. Multipliers also can be awarded for especially skilled lawyering and for taking a leadership role in a case.
This fee-for-hours system was adopted by federal courts just a few years ago, and lots of lawyers think it has contributed to the excesses uncovered in Fine Paper.
"Under the old system, if you settled a case quickly, the judge took that into account and rewarded you for the result achieved," said Shapiro. "Now everything has been turned on its head, and you get rewarded for keeping your meter going. It's an invitation for abuse. When a laywer claims to have spent 1,000 hours in a documentary depository, how does the judge know if he was examining documents or reading Playboy?"
In Fine Paper, Kohn, who was eventually to play the key whistleblower's role in the case, said his colleagues submitted 97,000 billable hours to the judge for a job that could have easily been done in 5,000 to 15,000 hours. The judge, in his opinion, noted that more than three-quarters of those hours were expended after the initial round of settlements with some of the defendants, when virtually all the risk element was stripped from the case, and it in effect became a gravy train.
While some fault the hours/multiplier rule for encouraging lawyers to abuse the system, others finger judges who don't knock heads at the start of the case.
"The basic problem with fees in these cases is accountability," said Millstein. "When you represent a class of hundreds of thousands of clients, you've don't have any one single client with enough financial interest in the case to look over your shoulder and keep you from getting away with murder. The judge has to step in and play that role. He's got to look after the financial interests of the class."
Adds Samuel H. Seymour, a plaintiffs antitrust lawyer in Washington: "If a judge sees five lawyers showing up for a conference with him at the start of the case and he knows four of them are extrathe plneous, he's got to take those four aside and say, 'Look fellows, your kids aren't going to college on this one.'"
Excessive fees are not the only thing that infuriates critics of these suits; industry is up in arms about the settlements themselves -- where they go and how they're won.
Class-action suits are a fairly recent innovation of civil procedures. In 1966, the Supreme Court eased the rules for certifying vast classes of plaintiffs -- again, stirred by the populist notion that lots of "little guys" with similar small claims ought to be able to band together to get relief from a common defendant or defendants.
Critics say the suits haven't worked as intended, especially not in the antitrust field, where they have become "Frankenstein monsters" that reward lawyers without compensating injured parties.
The problem is this: When manufacturers conspire to fix the price of a product, the group that ulitmately suffers the overcharge is the consumer. Consumers, of course, rarely buy directly from a manufacturer. But the Supreme Court ruled in the Illinois Brick case in 1977 that the only "consumers" permitted to join in a plaintiffs class action price-fixing suit were the first purchasers -- usually a retailer or a middleman.
That decision was designed to make class action antitrust suits more manageable. It did. Defense lawyers are less able to play off one set of plaintiffs against another.
But it also robbed the suits of much of the element of just compensation. Since first purchasers have often simply passed the alleged overcharge down the line, any damage awards they receive is likely to be a windfall.
Even with that, class action price-fixing suits have plenty of defenders. It wouldn't matter if the price-fixers had to pay damages to names plucked out of the phone book, they say, the real value of these suits is punishment and deterrence, not compensation.
"As a practical matter, these (class action) suits are by far the most effective deterrents to price fixing," says Shapiro. "Huge settlements are the one thing that has caught the eye of corporate executives."
Plaintiffs lawyers argue that government enforcement against price-fixing, either through civil or cirminal suits, has historically lacked bite. "You don't read about too many executives who get thrown into jail for price fixing." said Seymour. "As for fines, if a corporation makes $100 million in overcharges by fixing prices and then gets slapped with a $1-million fine, it's $99 million ahead of the game."
But the penalties extracted through triple- damage private class action suits are much stiffer. "We've been getting settlement undreamed of just a few years ago," says Specks. In addition to the $50-million settlement in Fine Paper, there was a $173-million settlement late last year with the plywood industry, a $350-million settlement completed last year with manfucturers of corrugated containers and a $200-million settlement with makers of folding cartons.
(The paper and forest product industry has been a frequent target of these suits. "Everything they touch," says Specks, "they fix. If there were some code against habitual offendors, they'd all be in jail.")
Corporations complain that the huge settlements are a testament not to their culpability -- indeed, many of the defendants in those same cases were found not guilty in criminal or civil trials -- but to the Draconian damage exposure they face in the class action suits.
The marriage of the modern class action device with the older antititrust deterrents of triple damages and joint and several liability places a corporate defendant in the following box: if its alleged co-conspirators are induced to settle, it is then exposed to a damage judgment based not only on its own share of the alleged conspiracy, but on the entire industry-wide scheme of overcharges (minus settlement amounts) tripled.
The damage exposure can run into the billions of dollars, and since most defendants are unwilling to "bet the company" on the valgaries of the jury system, they routinely wind up settling out of court, at a fraction of their exposure.
The dynamics of such cases are ready made for the plaintiffs' lawyers to divide and conquer. They can offer "sweetheart" settlements to the biggest and most culpable defendants. With each settlement, the damage exposure of the remaining non-settlers goes up, and plaintiffs' lawyer can tighten the screws accordingly. Three plywood makers, Georgia-Pacific Corp., Weyerhaeuser Co. and Willamette Industries Inc., learned recently just how high a price you can pay if you buck the pressure to settle, but then lose at trial.
Thirty-one of their alleged co-conspirators in a price-fixing conspiracy had settled with the plaintiffs class for a total of $8 million. But the three held out. On the eve of the trial when Kohn, Seymour and other plaintiffs lawyers offered them an $8-million settlement, "they laughed us out of the room," Seymour recalls. The defendants went to trial and lost -- suddenly their damage exposure exceeded a billion dollars. Last December, they finally settled, even though the Supreme Court had agreed to hear their appeal. The price: $165 million.
It was Kohn who more than a decade ago introduced what he calls the "system of escalation" into settlement negotiations. He announced in one of his cases that that the first defendant to settle would get the best deal, the next the second best and so on. Stephen Susman, a young Houston attorney who led the plaintiff's legal team in the $350-million corrugated case (after first fighting off an attempt by Specks to wrestle the leadership role away from him) describes how well the strategy can work. "Once we got our first big defendant to settle, the others defendants practically broke my door down. I was handing out multimillion settlements like they were car rental forms." (Susman's legal team currently has a $50-million fee request before the judge).
Kohn may call this a "system of escalation"; corporate America calls it "legalized blackmail" and "extortion." Last year Griffen Bill, Benjamin Civiletti, Sam Ervin, Birch Bayh and a supporting cast of dozens were hired to lobby Congress to remove the joint and several liability provisions -- and with it the huge damage exposure -- from such price-fixing cases.
The bill had virtually unanimous support in the business community, but it got hung up when corporate lobbyists got into an expensive, unseemly cat fight over whether its provisions should be made retroactive.
Kohn testified before Congress against the measure, as did others in the plaintiffs' bar. The current system has made them rich men, and they are not anxious to see it change. "These are the tools we use to induce companies to settle," Kohn said.
In the midst of the heavy lobbying, the fee bloodbath in Fine Paper hasn't enhanced the plaintiffs' bar claim to high moral ground. But Kohn insists that bringing the abuses of the system out into the open has had a cleansing effect. "If we don't police ourselves, the so-called reformers will come in an do it for us."
Imperious, arrogant, brilliant, envied, despised, Kohn has been called the godfather of his profession. His colleagues find it ironic that he came to play a whistleblower's role in Fine Paper; the practises he exposed, they say, he also invented. "Harold's problem is he doesn't like so many other lawyers getting into the action," says Sloan.
Even at age 68, Kohn guards his place at the top of the heap with the bite of a barracuda. "Everybody wants to kill the king," he says.
Those who have tried have paid. When Specks struck with his fee objection in Fine Paper, Kohn was ready to strike back -- twice as hard.
He filed a fee objection of his own with the court, accusing Specks of bringing scores of unnecessary lawyers aboard so he could wrest voting control of the plaintiffs' executive committee away from Kohn; rewarding them with "busy work," then, once the case was over, trying privately to persuade Kohn to on the valraise his fee request, not lower it, as long as he in turn promised not to object to the inflated fee petitions of Specks and his cronies. Specks denied Kohn's charges.
The bickering in Fine Paper had begun long before fee time. Kohn and Specks, old rivals who bump into each other is case after case, had argued over how the case should be managed, how many lawyers were needed, how much discovery work was necessary.
At one point, Kohn recalled in court, Specks wanted him to fly out to Chicago to participate in some meetings with the trial preparation team. He refused to go. "I am not going to waste my time . . . stultify myself and demean myself by going out there and doing precisely nothing," Kohn said.
As the trial approached, Specks went to Philadelphia to prepare, and he set up a "war room" a few blocks away from Kohn's office. Both co-lead counsel's meters were running full blast, and each had a duplicate set of documents. Kohn explains that he does not like to work in a crowd. "Nobody ever erected a statue to a committee," he says.
The elbowing will not end with Fine Paper. Plaintiffs'lawyers are by nature a contentious lot, the opportunities to haggle are endless. "Compared to handling your own co-counsel," says Sloan, "handling the lawyers for the Fortune 500 in these cases is a piece of cake."
Indeed, the next round is already underway. Sloan, the lead counsel in the $200-- million Folding Carton case, last month managed to convince a federal judge in Chicago, who had already awarded attorney fees of $13 million, to set aside an undistributed $6 million from the settlement fund to create a non- profit foundation that will study the antitrust laws. The executive committee of the foundation is to be made up of "Chicago-based attorneys."
The defense bar couldn't agree more that those laws are in need of study, but it smells a boondoggle for the plaintiffs' bar in Chicago.
Their objections are already on file with the court.
So are Kohn's.