Litigation
Jul. 24, 2002
$88 Million Fee Award 'In Outer Space
SACRAMENTO - A state appeal court ruled Monday that five law firms that successfully challenged a $300 smog fee charged to out-of-state vehicle owners are not entitled to $88.5 million in attorney fees for their labors.
Affirming a trial judge, the 3rd District Court of Appeal said such a huge fee award "violates an explicit expression of public policy" and would be "an unconstitutional gift of public funds." Jordan v. Department of Motor Vehicles, C038339.
At most, the appeal court said, the attorneys are entitled to $18 million for their success.
"The fact that attorneys even requested a fee award of that absurd magnitude from the taxpayers is a testament to the unreal world of greed in which some attorneys practice law in this day and age," said Justice Richard Sims in a concurring opinion."
Gov. Gray Davis, who directed the state to challenge the $88 million awarded by a panel of arbitrators, was elated by the ruling.
"An award of $88.5 million in attorney fees was not only unconscionable but unconstitutional. This is a great victory for the taxpayers of California," Davis said in a prepared statement.
Elwood Lui, a retired appellate court justice who helped represent the state, was also delighted.
"We just saved [the state] $70 million," Lui said. "That's a pretty good sum."
William Dato, of San Diego's Milberg Weiss Bershad Hynes & Lerach, who argued on behalf of the lawyers seeking the fees, said he had not read the opinion and could not comment. He said it would be some time before his clients would decide whether to seek a rehearing.
The controversy began in 1990 when the state enacted a statute requiring out-of-state vehicle owners to pay a special $300 "smog impact" fee when bringing in vehicles that did not meet the state's stringent emissions standards. The Legislature approved the law despite warnings from the state Legislative Counsel that the fee would be declared unconstitutional.
Beginning in 1995, four plaintiffs, represented by five law firms, challenged the smog fees. Beside Milberg Weiss, the firms were Weiss & Yourman of New York; Blumenthal Ostroff & Markham of La Jolla; Sullivan Hill Lewin Rez & Engel of San Diego; and the law offices of Richard M. Pearl of San Francisco.
After a Sacramento Superior Court judge ruled the fees violated the U.S. Constitution's Commerce Clause, Gov. Davis decided to settle the matter by refunding the fees to the 1.7 million vehicles owners who had paid it.
The state also agreed to let a panel of arbitrators decide how much the attorneys should get in fees.
In November 2000, the arbitration panel, composed of retired Chief Justice Malcolm Lucas, retired Court of Appeal Justice John K. Trotter and retired Los Angeles Superior Court Judge Bonnie Lee Martin, agreed that for their work the attorneys were entitled to a "reasonable" percentage of 13.3 percent of the $665 million fund that the state created to settle the litigation.
After Davis and other state leaders expressed outrage of the magnitude of the award, Lucas reversed himself. But Trotter and Martin stood their ground, and the state filed suit.
In April 2001, Sacramento Superior Court Judge Joe S. Gray threw out the fee award, saying the arbitrators had overstepped their authority.
In its 35-page opinion, the appeal court said the attorneys were entitled to only $18 million - 5 percent of the $363 million allocated for refunds of the smog fee to the owners of out-of-state vehicles - as originally ordered by a trial judge. Any amount above $18 million would be an unconstitutional gift of public funds.
In affirming, the appeal court said when the state gave the case to the arbitrators, the parties implicitly accepted the trial judge's cap. Therefore, the panel said, anything above that amount violates the constitutional prohibition on a gift of public funds.
"The question is whether there is a public purpose in paying more than the state's established maximum exposure," wrote Justice Fred Morrison. "We see no benefit to the public, only benefit to [the] attorneys."
The justices rejected Dato's argument that the fees should be granted under a common fund theory of recovery because the decision to create a refund was the governor's and the Legislature's and did not stem from a court judgment.
In his separate concurring opinion, Sims criticized both sides in the case.
"It is all to the good that the state will not have to pay an $88 million fee award that was - at more than $8,000 per hour - completely in outer space, totally over the top," he wrote.
However, Sims predicted the case would come back to bite the state, which, he said, "wantonly breached its arbitration agreement."
The arbitration agreement stated it was binding on all parties, and when the case was submitted to the panel, there was no monetary cap specified, he noted.
"This case illustrates that the state will breach an arbitration agreement with impunity when it is in the State's interest to do so," Sims wrote. "This case will therefore result in fewer private citizens agreeing to arbitrate disputes - and particularly major disputes - with the State. We will see all these major cases in court, at considerable increased expense to the taxpayers."
"I leave it to the attorneys of this state to advise their clients when the clients ask whether they should agree to binding arbitration with the state," he concluded.
"But I know what I would say."
Lui said the attorneys asking for $8,000 an hour should have known better.
"The 'gift of public funds' [prohibition] has been on the books so long, the attorneys, when they asked for more than $18 million, should have known they were in harm's way," he said.
Scott Bertzyk, of Jones Day Reavis & Pogue, who represented the state along with Lui, said that although the case is unique, the opinion is significant.
"It gives people who choose to arbitrate checks and balances, and says that arbitrators can't go crazy," Bertzyk said. "There are still courts that can correct abuses like that which occurred here."
The appellate court ordered a new arbitration with a new panel to determine what the lawyers for the five firms should receive in fees based on reasonable hours and fees that in any case cannot exceed $18 million.
Linda Rapattoni
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