Without even setting foot in a courtroom, Russ and Maury Herman have frightened a fortune out of the health insurance industry.
The brothers and law partners have created a "national mega-firm," linking lawyers across the country to sue HMOs for a variety of alleged frauds. It's unclear whether these cases will win over judges or juries. But spooked by litigation filed by the Hermans and others, investors unloaded shares of national HMOs in a late-September frenzy, erasing $12 billion in stock value in a single day. Some of the companies have yet to recover.
"What the HMOs need is an attitude adjustment," drawls Russ Herman, the older of the pair. The sell-off highlighted a new style of legal attack that has helped plaintiffs' lawyers win record-setting sums in the past year. Once loners by nature, trial lawyers are now allying to split costs, share information and demonstrate that their pockets are deep enough for protracted war.
The strategy is giving corporate America a gang problem of its own. The key audience in these campaigns isn't the targeted companies, whose coffers still dwarf the combined bank accounts of even the wealthiest plaintiffs' firms. It is Wall Street, which in some notable cases has severely battered the share prices of corporate defendants, pushing them to the settlement table.
By leveraging the might of the stock market, these legal collectives are altering the balance of power in the never-ending battles between trial lawyers and the companies they sue.
Juries are increasingly willing to punish businesses with huge punitive-damages verdicts, angling to send messages to other players in an industry. In 1998, the top 10 verdicts awarded in the United States totaled $2.8 billion, up 375 percent over the top 10 verdicts of 1997, according to Lawyers Weekly USA. Those figures have turned courts into increasingly treacherous and unpredictable terrain for corporations.
"It's the fear of the nuclear-bomb verdict that gives leverage to plaintiffs' lawyers to make threats and play off a company's stock price," said George Priest, a professor at Yale Law School. "Jury verdicts nowadays can put companies out of business."
At the same time, a handful of judges, frustrated with the paralysis of legislatures, have been allowing plaintiffs' lawyers to try out legal theories once considered adventurous at best. The New York lawsuit that helped breathed life into what is now a multi-city assault on the gun industry, for instance, was based on a concept that other judges have rejected for years.
Some corporate lawyers now say that the legal merits of any given case are all but beside the point. What matters most is putting together a squad of lawyers big and rich enough to convince Wall Street that a company will be bogged down in courts for years.
"It's legal extortion," said Victor Schwartz, counsel to the American Tort Reform Association, a group that has lobbied for tighter limits on class-action suits. "Every CEO fears the random billion-dollar verdict and the wrath of stockholders that could bring. But when companies settle, even if it isn't on the merits, the stock will rise."
Consumer advocates and some academics contend that plaintiffs' lawyers are merely leveling a battleground that has long been tilted disastrously against them. Fortune 500 companies, they say, have for years tried to overwhelm adversaries through attrition, swamping their far smaller antagonists with reams of documents and stalling long enough to force them to the brink of bankruptcy.
"If your opponent has tremendous financial resources, you need tremendous financial resources," said Heidi Li Feldman of Georgetown University Law Center. "Until the early 1990s, the plaintiffs' bar didn't have the financial resources to compete."
Tag-team lawyering began in earnest during the tobacco wars of the 1990s and has since been refined by various practitioners. Aided by e-mail messages and CD-ROMs, for instance, an allied scrum of attorneys recently provoked American Home Products Corp. into a $3.75 billion out-of-court settlement with users of the fen-phen diet pill combination. Company executives said their willingness to deal was driven largely by the need to resuscitate the company's shares, which were nearly cut in half by investors fretting over the prospect of years of litigation.
In the HMO suits, Wall Street is playing its most prominent role to date. One lawyer who is not affiliated with the Hermans, Richard Scruggs of Mississippi, has taken the unusual step of meeting with key HMO analysts at Morgan Stanley Dean Witter and Prudential Securities and even participated in a conference call with dozens of institutional investors.
According to Scruggs, the purpose of these discussions is to educate. "In the past, nobody has communicated directly with investors about the vulnerability of their money," Scruggs explained. "Executives usually get their advice from company lawyers who tell them to fight until the last investor's dollars are spent."
Officials at Aetna Inc., a defendant in one of the suits, have a more sinister take on Scruggs's dialogue with Wall Street, describing it as part of a campaign to frighten HMOs to the negotiating table.
"In one day, more than $10 billion in American savings was vaporized just by the bark of the wolf," said Aetna chief executive Richard L. Huber, referring to the plunge taken by HMO shares after the lawsuits came to light. "The brazenness is astounding."
Billions in legal fees are spent every year by U.S. corporations defending against a dizzying variety of product-liability and personal-injury suits. To plaintiffs' lawyers, the suits are an invaluable way to hold corporations accountable for corner-cutting that harms consumers. Critics of the tort system contend these lawyers are far better at enriching themselves than winning justice for clients, who in some case have ended up with trifling sums while their attorneys pocket millions of dollars.
Veterans of dozens of court triumphs, the Hermans are taking joint lawyering to another level. Short, wry and ubiquitous, the brothers have built their practice courtesy of a series of chilling accidents, such as railroad collisions and industrial explosions. One plaque in their office heralds a $3.5 million settlement for an elderly woman who was the victim of an electric shock administered by a hand-held "personal massager."
That award began to seem like chump change after the brothers were hired by Louisiana's attorney general to join a group of lawyers participating in landmark tobacco lawsuit, a case that yielded a $260 billion out-of-court settlement. Two years ago, when the Hermans conceived a full-blown attack on HMOs, they concluded that the litigation would be too risky and expensive to go it alone.
"We're not foolish," Russ Herman said with a grin. "We've got families to support."
They decided to launch a "firm of firms," as they call it. Enlisting firms in California, Georgia and Mississippi that had been co-counsels with the Hermans in previous cases, the group commissioned a study to determine where the new firm should be based. Atlanta got the nod because it's an air-transportation hub and home to four law schools, which will make it easier to recruit the teams of researchers the firm needs.
For help drafting a first-of-its-kind partnership agreement, Russ Herman called on the Washington firm of Patton Boggs, run by the Hermans' longtime family friend Tommy Boggs. After months of research and $500,000 in start-up costs, Herman, Middleton, Casey & Kitchens, as the firm is called, opened its doors in July. The Hermans expect that litigating the HMO cases could cost a total of $3 million, and perhaps much more.
Since the brothers went public with their plans in late September, other firms have filed similar actions, including a case against Humana Inc. When news of these suits hit Wall Street, shares of Aetna dropped 18 percent and a Morgan Stanley index of health insurance stocks sank by 10 percent. The companies have since regained some, though hardly all, of those losses. Last month, the House of Representatives added to the woes of insurers by voting to broaden the rights of patients to sue their HMOs.
While success with these suits is hardly assured, the sheer magnitude of this onslaught, coupled with the enduring unpopularity of the HMO industry and the pummeling of insurance companies at the hands of Wall Street, could matter more than the legal niceties. Tobacco companies, after all, settled at a negotiating table rather than duke it out in the courts, where they prevailed for years. Public opinion was turning against cigarette makers, and they finally faced foes with enough cash to last through countless trials. Investors fled in droves.
In its basic outlines, that's the predicament facing managed care today.
"If HMO investors were smart," said plaintiffs' lawyer Richard Scruggs, "they'll lean on their companies to see if we can work something out."
Staff researcher Richard Drezen contributed to this report.