A Good Tobacco Tax
Bush vs. the trial lawyers.

March 14, 2001

hen Congress was debating a comprehensive, lawsuit-settling tobacco bill in 1998, Republicans proposed an amendment to cap the anti-tobacco lawyers' fees at $2,000 an hour. Washington Post columnist Richard Cohen wrote a tough piece on how the Republicans had abandoned their usual principles—hostility to price controls and belief in the free market and the sanctity of contracts—in order to stick it to the lawyers. If Cohen wants to revisit this topic, he now has an even better example of apparent hypocrisy: President Bush is proposing a 200 percent tax on most of those fees.

But Cohen was wrong and Bush is right. The first thing to understand when thinking about the tobacco lawyers' fees is that they are not analogous to market prices. They're more like ransom payments. Lawsuits are not free-market exchanges. The license to practice law is a deputized governmental power. That's why the law of every state mandates that any retainer agreement that lists a fee follows it up with the phrase "unless it violates fiduciary standards by being excessive."

It is reasonable for lawyers to demand high fees when they take risks. But it is not reasonable to pay them $200,000 an hour. Especially when, as in Maryland and Florida, the risks were eliminated by state legislatures that, acting at the lawyers' behest, passed laws to nullify the tobacco companies' legal defenses. Or when the fees were for copycat suits that were clearly going to win.

The anti-tobacco lawyers were well aware that their fees raised ethical concerns. So they sought rather brazenly to prevent any ethical scrutiny of their fee arrangements. They wanted to set up arbitration panels on their fees with the defendants — even though the tobacco companies had no particular interest in how much of the money they were paying out was going to the lawyers and how much to the state governments. The lawyers' clients, in other words, were to have no say in the matter.

But as Michael Horowitz pointed out in the latest Weekly Standard, an obscure line in Bush's budget proposal may upset the lawyers' plans. The line appears on page 80: "The budget also assumes additional public health resources for the states from the President's proposal to extend fiduciary responsibilities to the representatives of States in tobacco lawsuits." What this means is that Bush is prepared to apply to the lawyers the same rule that applies to pension-fund trustees and foundation executives: If their fees are so high as to violate fiduciary duties, they have to either give back the excess or pay $2 in tax for every excess dollar they get.

Mitch Daniels, head of Bush's budget office, pushed for this provision. It is quite clever, because it sets up a fight in which Democrats will have to choose between giving the lawyers the money and giving the money to the sick ex-smokers for whom they have claimed to labor. If Bush really presses for this policy, he has a very good chance of prevailing. And the poor anti-tobacco lawyers will have to settle for $3,000 an hour.