You often read about state attorneys general joining together to sue a company, in the process making headlines as “fighters” by wringing money out of a company. The lead AG’s office in one state does all the work — or farms out the litigation work to buddies in the trial bar — and the other attorneys general sign on for the publicity and political gains.

But sometimes attorneys general say “no.” Given an opportunity to tag along on an anti-business lawsuit with all the potential monetary and PR rewards, an attorney general will actually refuse the blandishments and AG peer pressure and say, “No, this suit does not serve the interest of the citizens of my state.”

Indiana’s attorney general, Greg Zoeller, is the latest state AG to make such a decision earlier this month when he declined to support a qui tam lawsuit against JM Eagle, the world’s leading manufacturer of PVC and plastic piping.

Qui tam is the Latin and legal term for whistleblower lawsuits, that is, a lawsuit by someone claiming to be revealing previously hidden accounts of wrongdoing. The term “whistleblower” generally has a positive connotation, but too often the lawsuits are filed by employees who have been fired or otherwise disciplined. Combine revenge with a profit motive — the Federal False Claims Act (FCA) allows the claimant to receive a portion of the money the government recoups — and you wind up with big incentives for frivolous or abusive litigation.

Such is surely the case with the litigation that Zoeller is refusing to support, a position shared by the AGs from California, Massachusetts and Florida. And their refusal is news.

The basics of the litigation are this: A disgruntled former employee, John Hendrix, sued the company after he was fired, claiming JM Eagle produced substandard pipe that led to burst water pipes around the country. Hendrix gained the institutional backing from the big qui tam, class-action law firm, Phillips and Cohen. The trial lawyers have been doing what trial lawyers do — recruiting more people to sue, ginning up PR, and working to damage the company’s reputation.

But JM Eagle is fighting back aggressively, refuting the lawsuit’s claims and filing for the suit’s dismissal.
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While the National Association of Manufacturers has made the investment-discouraging derivatives provisions of the financial regulation bill its focus of attention, S. 3217, other sections of the bill would also add uncertainty and increase the costs of doing business in the United States. The Washington Post, among others, caught up on those provisions over the weekend. For example, there’s the corporate governance language, which would allow special-interest groups like organized labor and environmentalists to force their political agendas upon stockholders.

“CEOs from far and wide band against financial bill provision“:

A rush of chief executives from a wide swath of industries has been coming through Washington over the past three weeks, talking to lawmakers about a long-debated issue called “proxy access,” which would make it easier for shareholders at all publicly traded companies — not just banks — to nominate board directors. Opponents say the rule has nothing to do with overhauling Wall Street and doesn’t belong in the legislation.

“This is our highest priority,” said John Castellani, president of the Business Roundtable, which represents 170 chief executives. “Literally all of our members have called about this.”

The NAM and other business groups signed a joint letter to Congress last month sharply opposing the provisions.

The consumer protection provisions of the financial regulation bill also represent a major expansion of government control over the economy, directly through the federal government as well as indirectly — and potentially even more damaging — through state attorneys general and their political allies in the plaintiffs’ bar. The Post’s story, “Lawmakers, financial firms push to limit state power on consumer protection,” reports on the efforts by Sen. Tom Carper (D-DE) to rein in the most harmful elements in the bill.

Carper said he shares the White House’s goal of establishing a new consumer protection bureau to guard against fraud and deceptive practices.

“All my amendment says is that we should make that bureau do its job. This is the cop on the beat that we need,” Carper said. He warned that if state regulators are also allowed to pursue cases against national banks, this would cause confusion as consumer protection rules are interpreted differently by dozens of separate governments.

Carper’s amendment, which would limit the ability of state attorneys general to enforce federal law against national banks, has more than a dozen sponsors on both sides of the aisle. It could come up for debate early next week.

Sen. Carper’s amendment is S.Amt. 3949, and the text is available here.

The NAM has also opposed Sen. Specter’s amendment to expand liability in securities fraud litigation to parties not involved in the fraud, i.e., his attempt to overturn the U.S. Supreme Court’s ruling in Stoneridge v. Scientific Atlanta. On Thursday, Sen. Specter (D-PA) urged his colleagues cosponsoring the amendment to come to the Senate floor in support of it, but according to the Congressional Record, none did. The Senate is expected to vote on amendments this evening, but it seems safe to say the Specter amendment will not be considered until after the results of the Pennsylvania primary election on Tuesday. If Senate Majority Leader Reid files cloture on the entire 1,400-page bill today, as reported, then the Stoneridge amendment may be stone dead. That would be good.

A major section of S. 3217, the Restoring American Financial Stability Act, establishes the Bureau of Consumer Financial Protection with the broad authority to enforce violations of whatever strikes its fancy. At the same time, the financial regulation bill empowers state attorneys general to embark on their own exciting adventures of enforcement.

The Section is Title X, entitled the Consumer Financial Protection Act of 2010. As the title’s Section 1031 lays out, the law gives the Bureau the authority to act against “a covered person or service provider” that commits “an unfair, deceptive, or abusive act or practice under Federal law in connection with any transaction with a consumer for a consumer financial product or service…”

So now “unfair” is going to be a crime? That’s a vague standard, as are all the terms used in the list of offenses. The Bureau is supposed to develop the rules that further define its authority, and one hopes those rules clarify and limit the offenses. But it wouldn’t surprise us that enough ambiguity remains to invite arbitrary enforcement based on subjective standards.

Even more worrisome is that the bill also authorizes the 50 states and their attorneys general to enforce the same provisions. From Section 1042, “Preservation of Enforcement Powers of States”:

1) ACTION BY STATE- The attorney general (or the equivalent thereof) of any State may bring a civil action in the name of such State, as parens patriae on behalf of natural persons residing in such State, in any district court of the United States in that State or in State court having jurisdiction over the defendant, to enforce provisions of this title or regulations issued thereunder and to secure remedies under provisions of this title or remedies otherwise provided under other law. A State regulator may bring a civil action or other appropriate proceeding to enforce the provisions of this title or regulations issued thereunder with respect to any entity that is State-chartered, incorporated, licensed, or otherwise authorized to do business under State law, and to secure remedies under provisions of this title or remedies otherwise provided under other provisions of law with respect to a State-chartered entity.

Alarmingly, there’s nothing in the legislation that would require the state AGs to stick to the same standards the Bureau of Consumer Financial Protection will promulgate. The state AGs will enjoy free rein to sue whomever they want in state court for a violation of this new consumer financial protection statute.

Some state attorneys general also engage in the dubious practice of hiring private law firms to carry out the state’s litigation. As Victor Schwartz, who chairs the Public Policy Group at Shook, Hardy & Bacon, explains it to us:

The primary motivation of these private attorneys is to maximize an award or settlement amount; motivations which may directly conflict with the public’s interest in ensuring that justice is achieved. This profit-seeking objective is particularly problematic when the private attorney works on a contingency basis.

It’s not hard to imagine: An ambitious attorney general deciding to file a civil suit on behalf of all the state’s citizens against some company that did something “unfair,” and then hand over the litigation to a private law firm interested in the biggest payout possible. It could be good politics, but it would be hell on the rule of law.

The Senate this afternoon again failed to invoke cloture on a motion to proceed on S. 3217, the financial regulation bill, by a vote of 57-41. The vote will undoubtedly elicit media coverage about the politics of the votes, the partisan positioning and who could be hurt for the 2010 elections. All worthy topics, but it would sure be nice if the delays were used by journalists and the public to look more closely at what’s in the bill. We shouldn’t have to wait until after the bill is passed to identify its invitations to litigation and political abuse.