The Rise Of State Attorneys General
Today, state attorneys general have the power to bring down entire industries. Tenacious, outspoken and working in concert, they pose a nimble new front of government enforcement. Together they have taken on the tobacco, healthcare and software industries, and the most aggressive among them have risen to national prominence.
"For 200 years they defended the state in cases brought by outside parties, or gave opinions to the governor and lawmakers on pending bills," says Drew Ketterer, Maine's attorney general from 1995 to 2001. "That was basically the job. Nobody really knew who these people were. "That landscape has changed forever. AGs are now major political players and policymakers. Corporate counsel need to pay attention to the new reality of multistate inquiries. They may not care if a state such as Maine sues them, but they'll sure care if it's Maine and 34 other states."
The dramatic transformation has left most GCs at a loss. Attorneys general are unlike the many entities legal departments are familiar with and tooled to engage.
For example, state AGs don't have the lumbering bureaucracy of legislatures or federal regulators, their focus isn't as specific as most enforcement agencies, and they certainly don't behave as a business litigation adversary. A lone state AG's investigation can quickly blossom into a highly visible multistate litigation if the general counsel doesn't know how to respond properly to the initial inquiry. And the plain fact is, most don't.
A New Era
The rise of state AGs is the result of the confluence of several trends_most of which are diffuse and gradual, such as the movement toward stronger states under the Rehnquist Court and federal deregulation. Every time the federal government divested control or deferred judgment, states stepped in and handed AGs more prosecutorial authority.
"State attorneys general have filled in a gap in federal regulation and enforcement," says Aaron Bayer, who soon will leave his post as general counsel of Connecticut College to head the national appellate practice at Wiggin & Dana in Hartford, Conn. "During the Reagan administration, there were cutbacks in antitrust enforcement, environmental enforcement and other things that fell within the purview of state AGs."
Bayer, who worked as a Connecticut associate AG under Joe Lieberman and Dick Blumenthal, says that the states' rush to fill the vacuum of deregulation coincided with increasing political significance of the AG's office. Lieberman, for instance, transformed the Connecticut office from a part-time position into the full-time, high-profile job that became his springboard for a successful 1988 U.S. Senate bid. Blumenthal subsequently used the office's expanded powers to become one of the most aggressive AGs in the nation.
Improvements in infrastructure, too, worked in favor of the AGs. For example, the technological advances of the 1990s enabled state attorneys general to better communicate with each other.
"I can't emphasize how strong an effect e-mail and conferencing has had on AGs' ability to become a force they never were before," says Andrew Pickens Miller, a partner at Powell Goldstein in Washington, D.C., and a former attorney general of Virginia.
Where initial correspondence between states took weeks, today an issue can arise in the morning, and a working group of several offices can be operational by afternoon.
Then there is corporate consolidation. Jim Tierney, who was attorney general of Maine from 1980 to 1990 and now teaches the nation's only course on multistate litigation at Columbia School of Law, says the rise of the AGs stems from the nationalization of the American economy.
AGs have always been consumer advocates at a local level. More often than not, that now means dealing with national companies.
"I live in a little town in Maine," he says. "If I have a problem with my local pharmacy, it's Rite Aid. And what they're doing to people in my town, they're doing in New York City, too. A national chain owns my funeral home. My grocery store is a national chain. My bank is a national chain. And I haven't even gotten to the point that people are buying more and more over the Internet."
Band Of Brothers
If all those things were the slow trickle of attorneys general accumulating power, the national tobacco settlement was the dam breaking.
What began as an inquiry by Mississippi Attorney General Mike Moore spiraled into an unprecedented joint effort. Under the Tobacco Master Settlement Agreement, signed by 46 attorneys general in November 1998, the tobacco companies will pay $ 206 billion to the states over the next 25 years. Florida, Minnesota, Texas and Mississippi settled with the industry independently.
Never before had so many AGs worked together or produced such staggering results. It awakened them to new possibilities.
"With the astounding success they had in the tobacco litigation, the attorneys general_to their own surprise_recognized they wielded an astounding amount of power," says James P. Dorr, a partner at Wildmann Harrold in Chicago. "As a result, they started working much more cooperatively through their association."
That organization, the National Association of Attorneys General (NAAG), is nothing new, but it's probably the most influential group that most GCs know little about.
NAAG_pronounced 'nag' and frequently and derisively referred to by outside counsel as the National Association of Aspiring Governors_was founded in 1907, but only came into its own in the 1990s. In practical terms, the tobacco settlement was the association's coming out party.
"We had done a lot of cooperating before that, but tobacco had a bombshell resolution," says John Payton, a partner at Wilmer, Cutler & Pickering in Washington, D.C. Payton was corporation counsel (the District's equivalent of AG) in the early 1990s and remains close to the organization. He was head of NAAG's Supreme Court Committee, where he led the push for states to file joint amicus briefs in cases before the high court and continues to represent the association in some litigation.
"Tobacco showed what happens when there is a complete federal vacuum," he says. "The feds all but left tobacco alone. They regulated tobacco, but they didn't do anything about the concerns that animated the states."
Tobacco proved to be a model issue for AGs_a bold display of their alacrity and effectiveness when working together. But it was by no means their only joint venture.
State AGs launched the Microsoft antitrust investigation before turning it over to Joel Klein at the Department of Justice. Their investigation of Household Finance Corp.'s mortgage lending practices led to a settlement that will pay consumers $ 484 million in restitution. And in recent years, NAAG's antitrust task force has taken on issues from telecom mergers to the pricing of pharmaceuticals.
AGs' concerted actions have played largely as cautionary tales to corporate counsel, but their efforts aren't without upside for the companies in the crosshairs. Working together makes attorneys general more potent adversaries, but it also facilitates nationwide settlements.
"There's nothing more troublesome than the prospect of being whipsawed in a parallel proceeding," says Joe Savage, a partner at Testa, Hurwitz & Thibeault in Boston. "There was a time when it was virtually impossible to reach full resolution because the states didn't work together at all. But over time NAAG put together coordinating groups that make it easier to deal with all 50 states because it's less ad hoc."
Multistate litigation isn't the only facet in the rise of state AGs. Success in joint efforts has emboldened some to tackle sweeping endeavors of their own. There is perhaps no better example than New York Attorney General Eliot Spitzer. Universally regarded as the most aggressive and formidable AG, Spitzer has single-handedly taken on Wall Street in the wake of recent securities scandals.
"If you had predicted five years ago what Eliot has done, people would have said you had lost your mind," Payton says. "To take on the big houses in New York and be unstoppable? You're crazy. But he did that, and it's going to have an impact on other AGs who have the ability to exercise responsibility over major industries in their jurisdiction. Eliot Spitzer completely occupied the field on dealing with the [securities industry], and no one tried to take it away from him."
Spitzer wasn't always a proponent of such potent state actions. In law school at Harvard in the early 1980s he was a staunch opponent of the New Federalism doctrine advocated by the Reagan and Bush administrations, which ceded more power to the states. That view, however, changed in time.
"I had an epiphany," he said jokingly in his keynote address at the Corporate Legal Times SuperConference in June. "All my hesitancies, doubts and intellectual angst about the New Federalism notwithstanding, when I was sworn in Jan. 1, 1999, I said, 'You know what? The New Federalism is looking better every moment.
"One of the things I've learned since college is that power is a zero-sum game. If they're giving it away, you've got to embrace it and hold it dear, because it's something people will try to wrest from you after an enormous fight."
Although he's the nation's most visible AG, he hasn't been the only one to embrace that power and act alone.
California AG Bill Lockyer's investigation into Enron's role in his state's energy crisis toppled one of the first dominos in the energy giant's collapse. Over four terms in the AG office in Connecticut, Blumenthal has never been shy in public battles, particularly regarding corporate mergers. Lisa Madigan, Illinois's new AG, has quickly established a tough reputation in an office previously noted for corruption and scandal.
Area experts also point to Washington's Christine Gregoire, West Virginia's Darrell McGraw Jr., Vermont's William Sorrell and Tom Miller of Iowa as some of the country's boldest AGs.
The Big Mistakes
If there is a single notion corporate counsel need to internalize with regard to today's powerful AGs it is this: When presented with an AG's inquiry, respond promptly, candidly and directly.
"I want people to realize the best thing to do is cooperate and help us understand what's going on," says California's Lockyer, a new-school AG who took office in 1999, just weeks after the tobacco settlement.
That sentiment is echoed by other AGs, past and present. Payton, Miller and Tierney all stressed the need for general counsel to get involved early on. The biggest error companies make is to shift into defensive mode immediately, a move that will only make the problem worse.
When an AG's office opens an inquiry, it isn't necessarily looking to wage war. The investigators don't know, for example, if a problem is the result of a branch office that has gone bad, the philosophy of an entire company or an industry-wide practice. They won't know until the company educates them.
"The biggest mistake is not talking to the AG before they are out of the box," Bayer says.
Once an attorney general has ramped up a full-scale investigation and begun collaborating with other states, resolution grows more difficult by an order of magnitude.
Unfortunately, too many companies raise the drawbridge and start girding for battle. They assume defensive posture before they even understand the internal problem_real or perceived.
"You can't allow the normal corporate process of massaging a problem to run its course," Miller says. "By the time it goes through the levels of internal bureaucracy, the situation may have metastasized out of control."
Miller says any correspondence from an AG's office should be routed directly to the GCs office and responded to promptly. Fast action and cooperation can head off a formal inquiry. That happens every day, but never makes headlines.
If an investigation proceeds to discovery, corporate reticence creates even more severe problems.
"The enemy of all lawyering is the clock," Lockyer says. "Unfortunately in the private sector there is a need to have conflict because it produces billable hours. I'm afraid the interest of some law firms may conflict with those of their clients, who would be better off with settlements than expensive litigation."
Lockyer says that companies often engage in unnecessary discovery fights. In the case of Enron, the first year of discovery produced only one page of documentation. Then came the deluge.
"There are two phases; the stonewall and the warehouse," he says. "When the documents finally come, it takes a long time to organize them and understand what you have. That reaction to an AG's request tends only to heighten our suspicion."
Initial defensiveness can be the first step in a chain reaction that invites not only suspicion, but also bad advice from outside counsel.
"Too many [outside] lawyers begin their advice by attacking the prosecutor_usually because they are trying to get business from the corporation," says Tierney, the former AG of Maine. "'You didn't do anything wrong!,' they say. 'That guy's just running for office!' But if you begin by making snide remarks about running for office, what do you think is going to happen?"
Even if parochial interest doesn't color the advice of outside counsel, it's in their nature to show up for a fight. Companies that believe heavy-duty litigation is coming their way tend to hire outside counsel who have been in the trenches. Those outside counsel view themselves as litigation specialists, and often assume the battle lines are already drawn.
Out Of Control
Among the hardest pills for corporate counsel to swallow is they have no spin control. When a settlement is reached in a private commercial dispute, the parties sign a nondisclosure agreement and go about their business. A settlement with an AG is followed by a press conference that often goes into great detail on issues of consumer interest.
"The stupidest thing to try and negotiate is press," Bayer says. "You can never get that from most of these guys. They will never cede control over what they say publicly. I've seen it be a real sticking point in the negotiations. You have your chits in negotiation and that one you won't win, so you better give it up quick and focus on areas where you might get some concession."
Lockyer agrees wholeheartedly. He says in the energy settlements, for example, a company tried to rewrite press releases.
"We had to explain to them that they can't do that with a public official," he says. "Most of what they want is to whitewash it so it sounds like their corporate release. I try to explain that it's better for them to have an independent public office say they've changed their practices than to just feed public cynicism by regurgitating their PR."
Likewise, he says, CEOs who fly in to chat with the AG need to adjust their expectations.
"Last week, for example, I had a meeting with the CEO of Wal-Mart [H. Lee Scott Jr.]," he says. "I was happy to learn something about the company and principles of management. But too often there is the belief that if you come in and say, 'Hey, we're good people,' that's going to make the investigation go away."
In the end, the most important conduit of communication is the GC and the senior in-house legal team. They are the ones who know the company best, and the ones the lawyers in the AG's office really want to hear from.
Here To Stay
As in many areas, effectiveness all comes down to communication; direct, sincere and lawyer-to-lawyer.
The power state attorneys general have amassed over the past decade has shifted the rules of the game, and companies have been slow to adapt. Corporate counsel must recognize the collective clout AGs represent and react accordingly. Today, AGs occupy a unique and increasingly significant junction of policymaking, enforcement and advocacy, and their potency will only grow.
"They're just getting better at what they do," says Savage of Testa, Hurwitz. "They have better budgets and better people."
They demand greater responsiveness than in the past, and companies that don't learn how to cooperate effectively will pay a price. Perhaps Spitzer best summed up this point in his June remarks:
"If you had to reduce it to one sentence: We're not going anywhere, we're going to hang around_so get used to it."3
The AG Club
NAAG Finds Its Voice
Founded in 1907 and based in Washington, D.C., the National Association of Attorneys General (NAAG) has taken on increased significance in recent years.
The organization exists to facilitate communication and cooperation among state and territorial AGs. As more power has shifted to the states over the past two decades, that mission has driven unprecedented collaboration among AGs, resulting in such notable achievements as the national tobacco settlement in 1998.
Working together, state attorneys general have forged into areas previously dominated by federal agencies. NAAG's Antitrust Multistate Task Force brings concerted actions to protect competition and consumers, while its Criminal Law Committee allows AGs to pool efforts on anti-terrorism initiatives and computer crime.
NAAG also has ongoing projects to foster collaboration on issues such as bankruptcy, civil rights, consumer protection, the environment and Medicaid fraud. Its Legislation Project monitors the effects of federal laws on the powers of attorneys general, and its Supreme Court Project coordinates joint briefs for the high court.
The organization's web site, www.naag.org, offers information on each attorney general, as well as extensive documentation on settlements, projects and meetings.
Rise To Power
How To Become An Attorney General
> Attorneys general are elected in 43 states and Guam
> The governor appoints the attorney general in Alaska, Hawaii, New Hampshire, New Jersey and Wyoming, as well as in American Samoa, the Northern Mariana Islands, Puerto Rico and the Virgin Islands
> A secret ballot of the legislature selects the attorney general in Maine
> The Tennessee Supreme Court appoints the attorney general
> The mayor of the District of Columbia appoints the Corporation Counsel, whose role is similar to that of an attorney general
At A Glance: The State Attorneys General
Bill Pryor (R)
Gregg Renkes (R)
Terry Goddard (D)
Mike Beebe (D)
Bill Lockyer (D)
Ken Salazar (D)
Richard Blumenthal (D)
M. Jane Brady (R)
District of Columbia
Robert Spagnoletti (acting) (D)
Charlie Crist (R)
Thurbert Baker (D)
Mark Bennett (R)
Lawrence Wasden (R)
Lisa Madigan (D)
Steve Carter (R)
Tom Miller (D)
Phill Kline (R)
Albert Benjamin Chandler III (D)
Richard Ieyoub (D)
G. Steven Rowe (D)
J. Joseph Curran Jr. (D)
Tom Reilly (D)
Mike Cox (R)
Mike Hatch (D)
Mike Moore (D)
Jeremiah Nixon (D)
Mike McGrath (D)
Jon Bruning (R)
Brian Sandoval (R)
Patricia Madrid (D)
Eliot Spitzer (D)
Roy Cooper (D)
Wayne Stenehjem (R)
Northern Mariana Islands
Clyde Lemons (acting)
Jim Petro (R)
W. A. Drew Edmondson (D)
Hardy Myers (D)
Mike Fisher (R)
Patrick Lynch (D)
Henry McMaster (R)
Larry Long (R)
Paul Summers (D)
Greg Abbott (R)
Mark Shurtleff (R)
William Sorrell (D)
Iver Stridiron (D)
Jerry Kilgore (R)
Christine Gregoire (D)
Darrell Vivian McGraw Jr. (D)
Peg Lautenschlager (D)
Pat Crank (D)