Davis Seeks Cut in $88.5-Million Lawyers’ Fee

SACRAMENTO —  In a surprise turnaround, Gov. Gray Davis on Wednesday urged that Controller Kathleen Connell hold up an $88.5-million payment to lawyers who sued the state to overturn a fee on motorists who registered out-of-state vehicles in California in the 1990s.

Characterizing the award as excessive, Davis called on the private arbitrators who granted it to reconsider their decision, even though Davis earlier this year pushed private arbitration to decide the issue.

Davis’ announcement followed press inquiries about the unusually high award, in which major political contributors to Davis would share, and bitter complaints by Connell and State Board of Equalization member Dean Andal.

Connell, who blasted the $88.5-million award when it was announced last week, said she was “delighted” by Davis’ move. Connell said she already had decided to seek a court order allowing her to suspend the payment.

She said she intends to seek approval for that step from the Board of Equalization, which oversees tax policy for the state. If Connell fails, the attorneys must be paid by Dec. 28, according to the arbitration agreement.

Officials believe the $88.5 million is the largest attorneys’ fee award ever in a lawsuit against the state, and it may be the first granted through binding arbitration. The firms won it after successfully suing California over the $300 “smog impact” fee charged for out-of-state vehicles.

As an alternative to arbitration, the state could have left the question to courts or resolved it in court-supervised mediation. Binding arbitration is unusual for the state, because the state cedes significant power in agreeing to follow a panel’s decision.

The state’s chance of blocking the award is not known. An agreement signed by the private lawyers and attorneys for the state says the arbitration panel’s decision is final.

“This award shall be binding on all parties, and there is no right of appeal, collateral attack or other review,” says the agreement, dated July 20.

The private lawyers were taken aback by Davis’ announcement.

“This is news to me,” said William Dato, attorney at Milberg, Weiss, Bershan, Haynes & Lerach, one of five firms that would share in the $88.5 million. Dato said a confidentiality clause in the arbitration agreement precludes him from discussing it further.

‘Beyond Any Notion of a Reasonable Fee’

Last year Davis, citing a state Court of Appeal ruling declaring the smog charge unconstitutional, stopped collection of the fee and abandoned further appeal to the state Supreme Court.

Earlier this year, Davis signed legislation earmarking $665 million to repay owners of an estimated 1.7 million vehicles who paid the fees. At Davis’ request, the legislation included a provision that lawyers’ fees be set by private arbitrators.

“However, I believe the attorneys’ fee award in this case goes far beyond any notion of a reasonable fee for the attorneys’ efforts,” Davis said in a written statement Wednesday.

Unless the award is somehow reduced, the governor’s decision to send the issue to arbitrators will cost state taxpayers tens of millions.

Public records, interviews and documents obtained by The Times show that:

* In March, the lawyers who sued the state were prepared to accept $25 million.

* In April, the state Board of Equalization, which was a defendant in the smog fee case, said the lawyers deserved no more than $1 million. Board lawyers, relying on arcane points of the law, argued that since no judge had deemed the case to be a class action, the lawyers were entitled to no fees, or at least to relatively modest sums.

* As late as May, the California attorney general’s office, which defended the state in the litigation, was prepared to fight a Sacramento Superior Court judge’s 1998 decision to give the lawyers $18 million.

If the courts had decided the question, the most the attorneys could have expected was $18 million--and perhaps significantly less, some experts say.

The law firms, which filed suits in 1995 on behalf of motorists who paid the fee, submitted time sheets to the Sacramento judge showing they worked about 7,900 hours on the case. Their rates ranged from $495 an hour for a senior partner to $60 an hour for a law clerk.

Even if the attorneys put in another 1,000 hours on the appeal, the $88.5 million amounts to more than $9,900 an hour. The arbitration panel awarded them a flat 13.3% of the money set aside by the Legislature, saying the lawyers achieved an “exceptional result” for motorists who paid the fee.

Davis advocated private arbitration believing that the panel would give lawyers less than $18 million awarded by the Superior Court judge.

“I supported the concept of arbitration with the expectation that the fee award would be less than the amount determined by the trial court, not substantially more,” Davis said.

Davis Defends Use of Arbitration

In brief comments Tuesday, Davis defended the decision to turn the attorneys’ fee question over to an arbitrator.

The Democratic governor noted that his appointee to the three-member arbitration panel was retired Supreme Court Justice Malcolm M. Lucas, a conservative and former law partner of Republican Gov. George Deukmejian. The plaintiffs’ lawyers picked a second retired judge, John K. Trotter, and both sides agreed on a third former judge, Bonnie Lee Martin.

“I couldn’t have picked a more conservative arbitrator,” Davis said.

The panel’s written ruling said the firms asked for 17.5%, or $116 million, of the $665 million. The panel noted that the plaintiffs’ attorneys received support in their request from two other former Supreme Court justices, John Arguelles and William Clark, who like Lucas had been appointed by Republicans.

University of Texas law professor Charles Silver, who also testified on behalf of the private firms, called criticism of the amount an example of the “demonization” of plaintiffs’ lawyers. But he also said states rarely, if ever, agree to have attorneys’ fees set in binding arbitration.

“It is very hard to get money out of the state,” Silver said. “Very commonly, things get compromised way down.”

Indeed, it may be the first time that California turned such a decision over to private arbitrators.

Wayne R. Smith, a Sacramento attorney who was chief of staff for Republican Atty. Gen. Dan Lungren, noted that the state has almost limitless capacity to litigate, and can drag out questions about attorneys’ fees for months or years.

If it had followed more traditional procedures, the state would have arrived at the attorneys’ fees in settlement negotiations, or allowed courts to decide the dollar amount. “I’d be shocked if you can find any government lawyers who are in favor of [binding] arbitration; it gives up power,” Smith said.

Former California Atty. Gen. John Van de Kamp, a Democrat, also could not recall allowing an arbitrator to decide such matters.

“We were very hesitant to put a case of this size [before an arbitration panel] without reviewability by the courts, simply because the state would want review should it go off base,” Van de Kamp said.

Unlike most court hearings, the arbitration hearing was held behind closed doors. Officials refused to release documents the panel considered before rendering its decision, saying the arbitration agreement requires that they be confidential. Even the amount the arbitrators were paid is being withheld.

The panel’s written decision initially was confidential. It might not have become public but for the outrage of Andal and Connell. Connell released it in response to a California Public Records Act request from The Times.

Andal, saying he he has been “working overtime trying to figure out a way to stop the payment,” welcomed Davis’ announcement, but also suggested that it was motivated by potential criticism that the governor was aiding a political contributor.

“Whether or not [Wednesday’s announcement] is just cover for Gov. Davis or will have the effect of having the arbitration panel reconsider, we do not know,” Andal said.

Milberg, Weiss, one of the five law firms that stands to benefit from the attorneys’ fee award, is a major donor to Davis and other Democrats. The firm has given $958,000 in campaign donations since 1997, campaign finance reports show.

Milberg, Weiss partner Bill Lerach and the firm gave Davis a combined $221,000 in his 1998 campaign, and another $20,000 since he took office. The firm gave $50,000 to state Atty. Gen. Bill Lockyer during his 1998 campaign, and $10,000 this year.

In addition to donating to campaigns, Milberg, Weiss has a Capitol lobbyist. Lawyers in the firm and its lobbyist helped shape the legislation that granted refunds to motorists. The firm reported spending $274,000 on its overall Sacramento lobbying effort in 1999 and through the first nine months of 2000.

There is no record that the other four law firms in the case have donated money to Davis.

Phil Trounstine, Davis’ communications director, said Davis wanted to “set up a process to take himself out of the picture and handed it over to the arbitrators.” Trounstine also said Davis’ lawyers feared that the Court of Appeal could have raised the attorneys’ fees beyond the $18 million granted by the Sacramento judge.

State Senate President Pro Tem John L. Burton (D-San Francisco), who helped steer the bill through the Legislature, defended the award, saying he was “not going to second-guess a three-judge panel chaired by Malcolm Lucas.”

“I guess the governor felt he had to do something,” Burton said.