Big Government, Big Contributors, and Little Taxpayers

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Big Government, Big Contributors, and Little Taxpayers:
Whose Interests Are Attorneys General Really Protecting With Government
Lawsuits?
NTU Foundation Issue Brief 121

By Mark Schmidt with Jerry W. Terry
March 22, 2000

Introduction
When the Attorneys General (AGs) of nineteen states signed on to the U.S.
Justice Department's antitrust lawsuit against Microsoft, it symbolized a
growing trend. From litigation against Big Tobacco, to suits against
magazine companies and even toy makers, AGs are becoming increasingly
aggressive in their pursuit of "consumer rights." Many observers applaud
these stepped-up legal efforts as "David vs. Goliath" encounters pitting
maverick public interest lawyers against relentless corporate juggernauts.
But the reality is not so simple. Unfortunately, these suits often have far
more to do with politics than with any alleged violation of law.

In a political culture increasingly dependent upon litigation rather than
reasoned debate and legislative action, this new activism by many of the
states' top legal officials should raise cautionary flags. As former Clinton
Labor Secretary Robert Reich points out, "the era of big government may be
over, but the era of regulation through litigation has just begun."1

We must ask ourselves who is really benefiting from these lawsuits. Is it
the wealthy trial lawyers (who have received more than $18 billion in
payments from the tobacco settlement alone), the reelection campaigns of AGs
(who have received priceless public relations points and millions of dollars
in campaign contributions from trial lawyers), or the taxpayers (who have
seen very little -- if any -- benefit from this litigation intended to
"protect" them)?

Background
Who Wants To Be A Millionaire?: The Big Tobacco Money Grab

Announcing his state's groundbreaking 1994 lawsuit against the tobacco
companies, Mississippi Attorney General Mike Moore insisted that the
litigation would recover money that the companies "rightfully owe to
Mississippi taxpayers." Yet according to Duke University economist W. Kip
Viscusi, because smokers tend to die younger, they incur less long-term
health care and retirement benefit costs. With all of the factors taken into
account, smokers pay more in tobacco taxes than they cost taxpayers in extra
health care. In fact, Viscusi estimates that smokers overpay their share of
health care expenses by as much as 32 cents per pack.2

Nonetheless, Moore and the other AGs argued that tobacco companies should be
forced to "reimburse" the state for the cost of providing health care
services such as Medicaid to victims of smoking-related illnesses. That way,
he claimed, "I can spare Mississippi taxpayers from paying medical bills
that are the tobacco companies' responsibility." That was then, this is now.

Moore's legal gambit proved successful. Mississippi, Florida, Texas and
Minnesota worked out a $40 billion settlement.3 Forty-six other states
eventually filed tobacco suits of their own, leading to a massive $206
billion agreement in November 1998. The states are scheduled to receive
these funds over the next twenty-five years, making the issue of how
settlement money will be allocated an important long-term political
question.

First, however, the trial lawyers took their share. In just three states --
Florida, Texas, and Mississippi -- lawyers will receive more than $8 billion
in legal fees out of a total $34 billion award.4 In Mississippi alone, trial
lawyers who never set foot inside a courtroom will collect an astounding 35%
of the state's $4 billion settlement.5

It is estimated that trial lawyers reaped a combined bounty of more than $18
billion from the tobacco settlement. Some of these attorneys earned $92,000
per hour for their "service" to the taxpayers.6

The remaining amount, more than $200 billion, will be paid to the states
over the next 25 years. Unfortunately, most states seem to have forgotten
that they brought the suit to return dollars to the taxpayers. Instead, the
tobacco settlement has become, in the words of one health-care lobbying
group, an "all-out battle for the funds."

First, the states, along with several groups including the National
Association of Attorneys General (NAAG) had to fight off scavengers from
Washington. They successfully lobbied to prohibit the federal government
from grabbing state tobacco settlement funds (incidentally, the U.S.
Department of Justice filed its own suit against tobacco companies in
September 1999).

Next, the states had to decide what to do with their newfound windfall.
Unfortunately, promises of taxpayer relief were almost immediately
forgotten -- new spending was the order of the day. While most states intend
to spend some of the spoils on health care initiatives, they also came up
with proposals such as:

$717 million for flood-control projects in North Dakota;
$1.2 billion for college scholarships and health programs in Nevada;
$300 million to make sidewalks handicapped accessible in Los Angeles;
balancing the state budget in Rhode Island;
deficit reduction in New York.
Smokers seem to be the only party not benefiting from the tobacco
settlement. As a result of the settlement, the cost of cigarettes has
increased by 63 cents per pack, a $230 per year increase for a pack-a-day
smoker. Ironically, almost none of the tobacco settlement fund will actually
be used for smoker's health care or smoking cessation programs.

Cashing In On Microsoft
Putting the bite on Big Tobacco was just the beginning of the government's
feeding frenzy. Microsoft would be the next big meal. Armed with a $300,000
donation from the NAAG, the AGs rolled forward with their anti-trust
blitzkrieg against Microsoft.7

In the case against Microsoft, Iowa Attorney General Tom Miller, speaking
for his 18 co-litigants after South Carolina withdrew from the case, said
they still believe that Microsoft's "anti-competitive conduct has resulted
in higher consumer prices, less consumer choice, and decreased levels of
innovation."8 However, the facts do not support the rhetoric.

Higher Consumer Prices?

Since 1990, the price of various Microsoft products has declined between 25%
and 50%. According to Metro Computing, an independent market-research group,
the typical street price of the Microsoft Word program has dropped 47% since
1991, compared with an 18% reduction in the price of Corel's WordPerfect in
the same time period.9

Ironically, according to the Association for Competitive Technology, it is
the government's own lawsuit against Microsoft that could cost consumers as
much as $30 billion, due to higher software prices that could result from
fines, damages, or inefficient "break-ups."10 Additionally, last spring
experts estimated the government's lawsuit against Microsoft had already
directly cost taxpayers between $30 and $60 million in administrative
overhead.11

Less Consumer Choice?

With the numerous software and computer network choices, it is difficult to
argue that Microsoft has reduced consumer choice. For instance, with the
recent AOL-Netscape merger, the new conglomerate currently controls 39% of
Americans' total time on-line -- ten times more than Microsoft.12
Furthermore, at one time, Netscape, by improving the original Internet
browser, came to dominate 86% of the browser market.13 Netscape still
distributes 160 million copies of its browsing technology per year.

Decreased Innovation?

Ohio Attorney General Betty Montgomery, one of the AGs who is suing
Microsoft, admits, "Many Ohio consumers have benefited from the innovative
products marketed by Microsoft over the last 18 years.14 According to Scott
McNealy, the president of Microsoft rival Sun Microsystems, "Government has
to come in and discipline [Microsoft] until the rest of the world catches
up."15 If Microsoft has caused a decrease in innovation, why does the rest
of the world have to "catch up"?

What Goes Around, Comes Around
Compounding the questions about the legitimacy of these and other suits are
concerns about the motivation of AGs in bringing the suits in the first
place. There are several possible reasons for their efforts: a) to vindicate
taxpayers who have been victimized by large, evil corporations; b) to
appease trial lawyers and other special interests; c) to appease
money-hungry state legislators; or d) to create a positive public image for
the AG, 43 of whom are elected.

a) State AGs say that lawsuits against large companies have been brought to
protect and vindicate taxpayers victimized by large corporations. In the
case of tobacco, it was claimed that "States spend billions each year on
medical care for smoking related illnesses." While this is certainly good
rhetoric for mustering support for a weak case, it does not hold up when the
economic data is considered. As previously noted, smokers actually pay more
than the extra health care "cost" for treating smoking related illnesses.

In the Microsoft case, 89% of computer users feel Microsoft has had a
positive impact on the computer industry, 69% of all Americans say Microsoft
should be left alone,16 and even 77% of computer industry executives oppose
forcing Microsoft to share the secret code for Windows, a sanction being
pushed by the states.17 And a recent poll conducted by Rasmussen Research
asked 1,000 people: "Which is the greater threat to the software industry,
Microsoft or the Justice Department lawsuit against Microsoft?" The results:
24.5% said Microsoft, 46.8% said the Department of Justice, and 28.7% were
not sure. These are the same people who the Attorneys General claim have
been "harmed" by Microsoft.

b) There are two indisputable facts that raise serious concerns about the
relationship of trial lawyers and AGs. 1) Trial lawyers have earned billions
of dollars from lawsuits brought by state AGs. 2) Trial lawyers give
millions of dollars to AGs election campaigns.

Over the last decade, trial lawyers have donated more than $100 million to
political campaigns.18

Trial lawyers who earned legal fees from the tobacco settlement have donated
nearly $2 million to political campaigns since the settlement.19

As of March, 2000, trial lawyers have given more than $18.7 million to
political campaigns during the 1999-2000 election cycle. Of the top 25
recipients, taking in a total of more than $11 million, all but one, the
Association of Trial Lawyers of America PAC, were Democratic candidates or
Democratic organizations.20

As of the March 7, 2000 primary, California Attorney General Bill Lockyer's
reelection campaign had already received more than $134,000 from trial
lawyers during the 1999-2000 election cycle. In the 1997-1998 election cycle
he received more than $1 million from trial lawyers.21 California is one of
the nineteen states involved in the lawsuit against Microsoft.

Mississippi Attorney General Mike Moore named Richard Scruggs, his top
campaign contributor, as lead counsel for the state's case against Big
Tobacco.22 Scruggs went on to work for 30 other states; he is scheduled to
collect billions of dollars in fees.

Former Texas Attorney General Dan Morales is being investigated for helping
a friend, attorney Marc Murr, who did almost no work in the tobacco case
cash in on the settlement. Ultimately, Murr voluntarily waived his $1
million fee after a federal grand jury subpoenaed all records relating to
Murr's fee contract with Morales.23 Additionally, of the five law firms
retained by Morales to represent Texas, four had contributed a total of
$150,000 to his campaign fund.24
Furthermore, many of the 19 states suing Microsoft -- including Utah,
California, Connecticut, and New York -- are home to Microsoft rivals such
as Novel, Netscape, Sun Microsystems, Bristol Technology, IBM and a myriad
of high tech companies.

c) The states have used government lawsuits against large companies to
supplement high state spending. In fact, nine of the twelve highest-tax
locations in the country are part of the Microsoft lawsuit.

As part of their strategy of using lawsuits to generate revenue, AGs in many
of the states -- including New York, Ohio, Minnesota, and Utah -- are eager
to use provisions in their laws that would allow them to fine Microsoft for
each antitrust violation "incident." "With per violation or per occurrence,
that would be millions and millions of dollars," said Doug Davis, a West
Virginia Assistant Attorney General.

In addition to the high-profile tobacco and Microsoft cases, AGs have
squeezed $56 million in antitrust settlements from Toys R Us, Mattel,
Hasbro, and Little Tikes, most of which will take the form of politically
expedient toy donations to needy children. AGs also reached settlements on
alleged price-fixing with Reebok and Keds that netted $16.7 million for
"women's charities" and public athletic sites.25 The success of these
lawsuits gives the AGs the publicity they seek, and gives the public a false
sense of security about the "free money" coming in to expand government's
aims. What the AGs do not tell consumers is that the money extracted from
demonized businesses results in higher prices.

d) As University of Texas Law Professor Lino Graglia says, the AGs seek high
profile cases because "it is in their personal interest to receive
publicity, and publicity in terms of being a battler for consumer
protection."26 Many pundits have observed that "AG" often stands for
"aspiring governor."27 Thus, it is not surprising that the states sued the
tobacco industry in May of 1998, just as the election races were poised to
heat up. Scott Harshbarger of Massachusetts and Hubert H. Humphrey, III of
Minnesota, both leaders in the tobacco settlement, ran for governor, as did
Dan Lungren of California -- all were defeated. However, New Mexico AG Tom
Udall won a seat in Congress, and sitting AGs Bob Butterworth of Florida and
Jim Ryan of Illinois were reelected.

Conclusion
In the recent government litigation to "protect" the taxpayers, nearly
everyone got a piece of the pie -- trial lawyers received billions of
dollars for their "service," AGs were lauded for saving us all from big
business and received campaign support from the trial lawyers they enlisted
to help, and legislators got more money to spend without having to vote for
an unpopular tax increase. And the taxpayers received more bureaucracy, more
government waste, more powerful special interest groups, and more hidden
taxes; in short, more business as usual.

1 Robert Reich, "Don't Democrats Believe In Democracy?," Wall Street
Journal, January 12, 2000, A22.

2 "Cigarettes: Overtaxed," NCPA Executive Alert, National Center for Policy
Analysis, www.ncpa.org.

3 Ann Davis, "Tobacco-Industry Largess Puts Plaintiffs' Lawyers in Fat
City," Wall Street Journal, October 8, 1998, B1.

4 Saundra Torry, "Huge Fees for Anti-Tobacco Lawyers," Washington Post,
December 12, 1998, A1.

5 Ibid.

6 Bob Van Voris, "That $10 Billion Fee: The New Tobacco Deal Will Generate
the Largest Fee Ever &endash; and It May Grow," The National Law Journal,
November 30, 1998, A1.

7 James Grimaldi, "Microsoft Trial Puts States in Back Seat," Seattle Times,
December 26, 1999.

8 "Statement of Attorney General Tom Miller: Comment on South Carolina
Withdrawing from Microsoft Antitrust Action," www.naag.org/miller.htm.

9 "Fact vs. Fiction," Microsoft PressPass,
www.microsoft.com/presspass.fvsf.htm.

10 Cincinnati Enquirer, January 25, 2000.

11 Robert A. Levy, "Consumers Will Foot the Bill for Antitrust Remedies,"
Legal Times, April 5, 1999, 22.

12 Saul Hansell, "AOL Takes on Phones, TV, and Microsoft to Create a New
World," New York Times News Service via Dow Vision,
www.nytimes.com/library/tech/99/07/biztech/articles/04aoll.html.

13 Steve Lohr and John Markoff, "How Software's Giant Played Hardball Game,"
New York Times, October 8, 1998, C6.

14 Betty D. Montgomery, "Boardwalk and Park Place in Cyberspace," May 27,
1998, www.ag.org.

15 T.J. Rogers, "What's Good for Microsoft," New York Times, October 20,
1998, A23.

16 Gallup Poll press release, April 12, 1999,
www.gallup.com/poll/releases/pr990412.asp.

17 John R. Wilke and David Bank, "Microsoft Seeks Allies to Halt Antitrust
Movement," Wall Street Journal Interactive Edition, May 1, 1998.

18 American Tort Reform Foundation, "Tracking the Trial Lawyers,"
www.triallawyermoney.com.

19 Ibid.

20 Ibid.

21 John Sullivan, "Trial Lawyers Contribute $2.5 Million through the Primary
Election," Civil Justice Association of California press release, March 20,
2000, www.cjac.org.

22 Robert A. Levy, "Tobacco Medicaid Litigation: Snuffing Out the Rule of
Law," Policy Analysis #275, Cato Institute, June 20, 1997, 12, 18-19.

23 "Payback," Texas Lawyer, June 7, 1999,
www.texlaw.com/sub/news/archive/060799/060799d.htm.

24 Clay Robinson, "Tobacco Politics Smoking Up Campaign Trail," Houston
Chronicle, September 14, 1997.

25 Myron Levin, "Teaming Up to Aid Consumers; With Activism and Sheer
Numbers, State Attorneys General Emerge as Powers in Regulating Business,"
Los Angeles Times, July 6, 1999, A1.

26 Ibid.

27 Christopher Georges, "Politics Play a Role in States' Status in Antitrust
Action Against Microsoft," The Wall Street Journal, May 28, 1998, A24.

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