A federal court in Kentucky recently entertained the issue of a state’s ability to contract with private attorneys on a contingency-fee basis. See Memorandum Opinion and Order, Merck Sharp & Dohme Corp. v. Conway, No. 3:11-51-DCR, dated Mar. 21, 2012 and Mar. 23, 2012 (E.D. Kentucky). The court’s two rulings are of particular interest to businesses facing prosecution, now or possibly in the future, under state consumer protection laws.
Here, the attorney general of Kentucky filed suit against Merck Corporation (“Merck”) in Kentucky state court for violating the Kentucky Consumer Protection Act, alleging that Merck willfully engaged in unfair and misleading practices regarding the medication Vioxx. One year into the litigation, the attorney general retained outside counsel pursuant to a contingency-fee agreement. The contract provided that outside counsel would assist the attorney general’s office, but that the attorney general would retain direct authority over the litigation.
Nearly one year later, Merck filed a lawsuit against the attorney general alleging that he “delegated [his coercive powers] to private lawyers having a clear, direct and substantial financial stake in the outcome” of the litigation, which is “a punitive enforcement action that must be prosecuted in the public interest or not at all.” At the same time, Merck sought a preliminary injunction, and the attorney general sought to dismiss Merck’s complaint. Ultimately, the court refused to grant a preliminary injunction or dismiss the complaint, issuing two orders that both provide significant insight into the state’s ability to retain counsel on a contingency-fee basis.
Merck’s failure to establish a likelihood of success on the merits of its claim was the driving force behind the court’s order denying the motion for a preliminary injunction. In analyzing Merck’s position, the court initially discussed how in criminal prosecutions, the right to an impartial tribunal precludes the use of contingency-fee contracts altogether. This includes a private attorney performing a criminal prosecutorial function. In expounding on this topic, the court explained that there is a small category of civil cases, including eminent domain and actions to abate a public nuisance, which require strict neutrality because of their public interest aspect and propensity for coinciding with criminal prosecutions. Acknowledging that the consumer protection action at issue did not squarely fit within the class of civil cases demanding neutral representation, the court did, however, conclude that the penal nature of the action implicated the requirement of neutrality.
With this in mind, the court further opined that despite the implication of neutrality, the state’s use of a contingency-fee agreement with outside counsel is constitutional provided that certain safeguards are in place. Most significant of the safeguards is the state’s retention of control over the litigation. Fundamentally, so long as the state maintains “direct control” over the litigation, outside counsel is not subject to the requirement of neutrality. In this case, the attorney general reserved the right to “direct” the litigation. Nevertheless, a court may still inquire into whether outside counsel ever “invaded the sphere of control” belonging to the state. It is on this principle that Merck hung its hat and lost its motion for preliminary injunction, but won its defense of the state’s motion to dismiss. Merck was unable to establish a likelihood that the contingency-fee counsel actually assumed control over the Vioxx litigation; however, Merck was able to sufficiently plead allegations of usurping control enough to sustain its defense of the complaint and conduct further discovery on the issue.
On April 10, Attorney General Conway filed a renewed motion to dismiss, arguing that Merck’s constitutional claim in federal court will interfere with pending state court proceedings in the underlying suit, and is thus precluded under the Younger v. Harris abstention doctrine.
The state’s ability to use outside contingency fee counsel is just another area of worry that corporate defendants have to concern themselves with in facing prosecution under consumer protection laws. For that reason, corporations should keep an eye on this case to see what discovery reveals and what the court actually deems sufficient to “invade the sphere of control” reserved for the state.
*Mr. Cruz-Alvarez is a partner, and Ms. Zucker an associate, both in the firm’s Miami office. The co-authored the September 19, 2011 WLF Legal Opinion Letter, “‘No Injury’ Class Action Plaintiffs Found To Lack Standing“.