The Legend of Richard Scruggs: More Myth Than Fact?
Ten years after the tobacco settlement, Richard Scruggs has a string of spectacular failures to his name -- and an indictment
The legend of Richard Scruggs is by now well-known. His fame took root in the 1990s, when he won settlements for shipyard workers in Pascagoula, Miss., who had been exposed to asbestos. It blossomed in 1998, when the former Navy fighter pilot pressured tobacco companies to agree to a $248 billion settlement. And, in recent months, his story descended into the realm of scandal when the 61-year-old Scruggs, his son David "Zach" Scruggs and three others were indicted in his hometown of Oxford, Miss., for trying to bribe a judge to get a favorable ruling in a fee dispute.
But the legend of Dickie Scruggs, as commonly told, generally omits a key fact. Scruggs' reputation as a giant killer of the plaintiffs bar is outdated. Even before the indictment his career was in decline [see "High-Wire Act"]. In the 10 years since the tobacco settlement, Scruggs has taken on a series of quixotic cases. These matters were much ballyhooed in the press, but in the end they shared two things: big enemies and bad results. The only major success he's seen in the last decade hasn't been for the underdog plaintiffs that he champions, but for a big corporation that he defended in a product liability case.
Scruggs' experience with tobacco, where the plaintiffs achieved what had once been thought impossible, may have left him with an unrealistic expectation of the power of the legal system to cure social ills, and perhaps an inflated view of his abilities. Befitting a man who tamed tobacco, he set hugely ambitious targets and goals. He tried to reform the health care industry, hold Wall Street responsible for subprime lending years before the mortgage crisis erupted and take on the insurance powerhouses after Hurricane Katrina. But in the end he was largely thwarted. He did not return calls seeking comment for this story. His lawyer, John Keker of San Francisco's Keker & Van Nest, maintains his client is innocent of the criminal charges. "There's no question he didn't know about any bribery scheme the way the government describes it," Keker says. He also notes that most plaintiffs lawyers incur their share of losses, and Scruggs is no different: "Ask any successful plaintiffs lawyer. That happens more often than not."
The tobacco settlement that made Scruggs so wealthy was in many ways an aberration. It was the first and so far the only time that plaintiffs lawyers had the clout of a small army of 46 state attorneys general behind them. In addition, one tobacco company, Liggett Group LLC, did the unthinkable and broke ranks, agreeing to cooperate with the plaintiffs. This unprecedented alliance pressured the biggest tobacco companies to negotiate.
Scruggs has never revealed how much he's earned from the tobacco settlement. A three-person arbitration panel awarded a host of plaintiffs lawyers more than $13 billion in fees, which the tobacco companies are paying over 20 years. As a pioneer of this litigation, Scruggs presumably received one of the largest chunks. After the settlement, he spent time in Tahiti and enjoyed his yachts, jets, fast cars and vacation homes. It was a life he likely never imagined during his childhood, when he was raised by a single mother who worked as a secretary in the Pascagoula shipyards. (His parents divorced when he was 6.) But, like many lawyers who don't have to work, he couldn't stop working. He seemed to believe that his tobacco wealth was coupled with a divine mandate to make the world a better place.
TAKING ON THE HMOs
After tobacco, Scruggs took aim at another populist villain, HMOs. He filed a class action RICO suit in October 1999 on behalf of up to 46 million patients who were members of six health maintenance organizations. He accused the defendents of falsely telling members that decisions about their treatment and coverage were based on medical necessity, when in fact cost-cutting guided these decisions. This litigation, he claimed, had "the power to dramatically improve the quality of health care throughout the nation." Scruggs outlined a multipronged attack: He expected institutional investors and Congress (where his brother-in-law Trent Lott was a senator) to fall in line and pressure HMOs to make sweeping changes. "We understand how to play this game now in ways that haven't been played before," he announced to Newsweek in 1999.
Scruggs enlisted some of his co-counsel from the tobacco crusade and hooked up with another famous lawyer, David Boies of Armonk, N.Y.-based Boies, Schiller & Flexner. But this star-studded assault fizzled. In 2002 Miami federal district court Judge Federico Moreno denied class certification. He reasoned that the patients' claims were too dissimilar because they had received so many differing representations from HMOs about the terms of their coverage. Scruggs and Boies proceeded with a few individual cases, but they recovered less than $250,000 in total settlements for a dozen individuals. And they didn't get a penny in attorney fees. "We got hammered," Scruggs candidly told The American Lawyer.
Instead, Scruggs could have filed a suit on behalf of doctors who contracted with HMOs. Joseph Langston, who worked with Scruggs on the HMO cases, explained to The American Lawyer in 2003 why they chose the patients: "We thought, frankly, the patients had the more compelling and emotional stories to tell." (Langston was indicted and in January pleaded guilty in a separate bribery case implicating Scruggs.) Meanwhile, a different group of lawyers moved forward with a RICO class action on behalf of 900,000 physicians. That group, led by Archie Lamb Jr. of Birmingham, got class certification from Judge Moreno and recouped settlements exceeding $2 billion.
GOING AFTER THE MORTGAGE COMPANIES
As the HMO suits were collapsing, Scruggs was pulled into another case with a sympathetic story line: low-income borrowers trying to fight Wall Street. Years earlier a group of plaintiffs lawyers had gone after First Alliance Mortgage Co., a subprime lender accused of charging excessive fees and engaging in fraud. Before Scruggs joined the litigation, in March 2002 the plaintiffs lawyers, the Federal Trade Commission and six attorneys general reached a $60 million settlement with the estate of the bankrupt First Alliance and its former chief executive officer. The plaintiffs then turned their sights on the deep pockets of Lehman Brothers Inc., which had loaned money to First Alliance and closely monitored its operations. Plaintiffs lawyer Sheila Canavan says she pleaded with Scruggs to help them. Scruggs was reluctant at first, recalls Canavan, a solo practitioner from Moab, Utah. "He said, 'I'm considering retiring. I'm mostly doing health care stuff.'"
Plus, Canavan says, Scruggs wanted to limit his workload and travel because he had undergone two back surgeries. Canavan says she swayed Scruggs by playing for him a tape of a woman describing how she had been deceived by a First Alliance loan officer. Scruggs changed his mind and joined the RICO suit filed on behalf of 4,500 borrowers in Santa Ana, Calif., federal court.
Helen Duncan, a partner at Fulbright & Jaworski who represented Lehman, says Scruggs and his team started with high hopes. "They wanted a billion dollars from us, but offered to settle for $500 million," she recalls. When Lehman tried to settle for a much smaller amount, Scruggs reportedly told the Lehman lawyers he could financially afford to see this case to the end. "God didn't give me all this money to settle," Scruggs said, according to Duncan.
Not all of Scruggs' co-counsel shared his optimism. "I did not feel there was the potential for a huge recovery [against Lehman]," says David Zlotnick of San Diego's Krause Kalfayan Benink & Slavens, who was part of the original team that sued First Alliance. Zlotnick believed the recovery would be severely limited by a provision in the First Alliance settlement. There, the plaintiffs agreed to limit their claims against Lehman to its proportionate share of fault, to the extent required by a 9th U.S Circuit Court of Appeals case. (In return, Lehman agreed to waive its objections to the settlement.) Zlotnick thought that this "bar order" would prevent them from getting much from Lehman.
Scruggs believed otherwise and approached the case like a tobacco-sized battle. "Scruggs came in with a whole crew of people," recalls Zlotnick. He enlisted friends from Mississippi, like John "Don" Barrett of The Barrett Law Office in Lexington, Miss., who has allied with Scruggs on many cases. Milberg Weiss and Lieff, Cabraser, Heimann & Bernstein also signed on. "They had a different style of litigating than I do," adds Zlotnick about the Mississippi contingent. "The Gulfstream style." (Scruggs and Barrett commuted to California on separate private jets.)
During the three-month trial in 2003, Scruggs couldn't outmaneuver the bar order. He argued that applying the order to intentional torts would violate public policy, but federal district court Judge David Carter disagreed. (In the midst of the trial, Carter did grant Scruggs' request for a break so that he could preside as King of Mardi Gras back home in Mississippi.)
The jury's verdict was technically a victory for Scruggs, but more bitter than sweet. The jury held Lehman liable for aiding and abetting First Alliance's fraudulent lending, and concluded that the plaintiffs had incurred $51 million in damages. But, following the judge's interpretation of the bar order, the jury found that Lehman was only 10 percent at fault for those damages, which trimmed the recovery to $5 million. Scruggs appealed to the Ninth Circuit without success. In December 2006 the appellate court remanded the case for a recalculation of damages that still would not have exceeded $5 million. At press time the plaintiffs had agreed to a $2 million settlement that is awaiting court approval.
The case has been a huge money drain for Scruggs' team. In their fee application, they are seeking only $1.5 million, even though they spent more than $9.3 million in time and costs. "It was a Pyrrhic victory," says co-counsel Daniel Mulligan of San Francisco's Jenkins Mulligan & Gabriel. "It was nice to win against Lehman Brothers, but the amount was definitely disappointing."
Over the years, Scruggs has attempted to paint himself as a different breed of plaintiffs lawyer, one who is more principled and discerning. He has criticized lawyers who rush to file securities lawsuits after a company's stock drops. "Those are piggyback cases, not primary kills," he told Chief Executive magazine in June 2002. "I try to take on companies that have successfully avoided liability but shouldn't have. I don't want to get there after the antelope has been brought down."
In addition to eschewing securities suits, Scruggs has also opted not to take a seat on the lucrative pharmaceutical litigation bandwagon. Scruggs, it seems, isn't eager to join a case where he can't be the leader. "I'm probably not the best person in the world to work with others on a coequal basis," Scruggs told The American Lawyer in 1996. "I like to make decisions and call the shots."
COURTING SULZER MEDICA
Scruggs' principles, however, haven't stopped him from jumping to the other side. In 2001 he offered his services to Sulzer Medica Ltd., a Swiss company deluged with suits after recalling 40,000 defective hip implants. Scruggs decided to aggressively pursue the assignment and repeatedly contacted the company's general counsel, David Wise, to set up meetings, according to Wise. The GC initially rejected the entreaties, until finally agreeing to listen to the lawyer's proposal. Scruggs could offer exceptional access to the plaintiffs attorneys, which included his Mississippi friend Barrett. After flying to Zurich to meet with Sulzer's board, Scruggs was hired.
"He brought to the table unique insight into and understanding of the mass tort plaintiffs bar [and] he was genuinely interested in helping to save the company," Wise explained in an e-mail to The American Lawyer. (Wise is now general counsel at Cyberonics Inc., Sulzer's successor.)
Scruggs described his services in a different way to the Dallas Morning News in 2001: "If you want to catch a thief, you have to hire a thief." Scruggs brought in plaintiffs lawyer Joseph Langston to assist. Scruggs and the plaintiffs lawyers ultimately reached a $1.1 billion settlement.
This corporate assignment would turn out to be Scruggs' most successful matter since the 1998 tobacco settlement. His fee was not tobacco-size, but it was generous. Sulzer paid Scruggs and Langston $5 million up front and a $20 million success fee, according to Daniel Becnel Jr., one of the plaintiffs lawyer in that case. Wise would not comment on the fee. Harvey Kaplan, a partner in Shook, Hardy & Bacon's Kansas City, Mo., office, who also represented Sulzer, offers the highest praise for Scruggs. "He was great," says Kaplan. "I found him to be creative, engaging and a gentleman." In the Chief Executive article, Scruggs explained his decision to side with Sulzer in altruistic terms: "They've been in business for 100-plus years, they make life-enhancing products, and they had one screwup. It's just another outlet for my idealism."
NEXT UP: NOT-FOR-PROFIT HOSPITALS AND WELDING INDUSTRY
Scruggs may bring the same idealism to his post-tobacco causes for plaintiffs, but they haven't fared as well. He has struggled in mass actions against not-for-profit hospitals and the welding industry.
Scruggs' battle against welding rod makers began in 2003, when he filed a case in New Orleans state court against Lincoln Electric Holdings Inc., General Electric Co. and others, alleging that the fumes from these rods cause neurological problems. More than 5,000 cases ended up as a multidistrict litigation, coordinated by Cleveland federal district court Judge Kathleen O'Malley, who appointed Scruggs and Barrett co-lead counsel. (More than 6,500 cases remained in state court.) Scruggs aligned himself with some of the country's best-known plaintiffs lawyers from the tobacco wars: Joseph Rice of South Carolina's Motley Rice; Walter Umphrey of Beaumont, Texas; Michael Papantonio, the name partner of Pensacola, Fla.'s, Levin, Papantonio, Thomas, Mitchell, Echsner & Proctor; and Richard Heimann of San Francisco.
The litigation looked promising at first. In October 2003 in a case outside the MDL not handled by Scruggs' group, a Madison County, Ill., jury awarded $1 million to a welder who claimed fumes caused his Parkinson's. "The Next Asbestos?" Forbes fretted in 2004. "I think we're talking aggregate damages way in excess of a billion dollars," said Scruggs' co-counsel John Climaco of Cleveland's Climaco, Lefkowitz, Peca, Wilcox & Garofoli in the Forbes article. The industry then settled the first Cleveland test case in 2005, paying more than $1.6 million.
But these defendants wouldn't follow the tobacco model. Instead of agreeing to a global settlement, they fought. They got an order requiring every plaintiff to detail his health claims. As a result of this and other defense motions, the federal caseload shrank to less than 1,700, according to Stephen Harburg, a Washington, D.C.-based partner at O'Melveny & Myers, which is the defendants' lead counsel. The claims of one test plaintiff set for trial collapsed when the defense secretly videotaped him acting much healthier than he claimed to be. Even plaintiffs lawyer Rice, who sat on the group's executive committee, eventually dropped out, opting to pursue fewer cases outside the MDL. "We wanted to take only cases we thought had more serious injuries," he says about the cases on Scruggs' docket.
"I think [the plaintiffs] thought they would overwhelm us with [cases], and if they could flood us with numbers early, we would buckle under the pressure," says O'Melveny's Harburg. Of the 18 cases that have gone to trial in state and federal court, the defendants have won 16. Still, the plaintiffs did get a lift at the end of last year, when a Cleveland federal jury ordered Lincoln Electric to pay $20.5 million to a former welder. Scruggs was not actively involved in that case, although a lawyer from his firm, David Shelton, assisted lead lawyer Climaco.
"We know they're tough cases," says Florida lawyer Papantonio. "Everybody had gone into this with their eyes open." Another co-counsel, however, grumbles about the costs of these cases. "[We've] lost more than we've won. Way more than we've won," says Becnel, who sits on the plaintiffs executive committee and says he has spent more than $1 million of his money on the cases.
Scruggs' attempt to reform the world of not-for-profit hospitals has foundered even more in the courtroom. In the summer of 2004 Scruggs started filing RICO suits against not-for-profit hospitals around the country, accusing them of violating their mandate to provide indigent care. The claims were made on behalf of uninsured patients who received huge hospital bills. The patients claimed standing as third-party beneficiaries of a contract between the hospitals and the federal government, a contract supposedly created by the hospitals' tax-exempt status. As usual, Scruggs' crusade attracted headlines, but the litigation sputtered. Every one of the cases has been dismissed on the pleadings. Most of the courts concluded that the plaintiffs have no standing. One judge lashed out at these actions. "Plaintiffs here have lost their way," wrote federal district court Judge Loretta Preska of the Southern District of New York. "They need to consult a map or a compass or a constitution, because plaintiffs have come to the judicial branch for relief that may only be granted in the legislative branch."
AND THEN THERE WAS KATRINA
Scruggs' string of professional disappointments was joined by a personal one. In August 2005 Hurricane Katrina damaged his house in Pascagoula and harmed hundreds of thousands of others in his home state. The situation was tailor-made for a Scruggs' attack: hordes of sympathetic plaintiffs versus unsympathetic insurance companies.
Scruggs responded by forming the Scruggs Katrina Group in September 2005 with Barrett and three other Mississippi firms. The next month they filed a test homeowner suit against Nationwide Mutual Insurance Co. on behalf of Paul and Julie Leonard, a Pascagoula police lieutenant and his wife. The Leonards' house was inundated with five feet of water, and the couple claimed damages exceeding $130,000. Nationwide paid them only $1,661, the portion that the insurer said was due solely to wind. The plaintiffs' policy covered wind damage but excluded flood damage, and Scruggs accused the insurer of undervaluing the wind damage. He also claimed that Nationwide should be liable for damage caused jointly by wind and water.
The case was tried without a jury by senior federal district court Judge L.T. Senter Jr. in Gulfport, Miss. After an eight-day trial, Scruggs failed to get much more for the Leonards. Judge Senter awarded them just $1,228 in additional recovery. The Leonards' damages were disappointing but Scruggs did win a key point that could help him in other cases. Senter invalidated language in the Nationwide policy that appeared to prevent any recovery for damage caused jointly by wind and water; he held that the language was ambiguous and could not be enforced. That victory was short-lived. In August 2007 the 5th Circuit reversed and held that the language was enforceable.
Before the 5th Circuit issued its opinion, Scruggs settled other cases against Nationwide for a confidential amount. Scruggs also settled a slew of suits he had brought against Allstate Property and Casualty Insurance Co. and State Farm Fire and Casualty Co. Inc. According to the Web site of the Katrina Litigation Group (which recently changed its name from the Scruggs Katrina Group) the group has settled 1,300 claims. As part of a settlement of 640 cases with State Farm, Scruggs and his co-counsel got $26.5 million in fees. The fee award prompted a suit by Scruggs' co-counsel, John Jones, who claimed Scruggs was denying him his portion of the fees. It was in this case that Scruggs is alleged to have bribed a Mississippi state court judge for a favorable ruling. Since his indictment, Scruggs has withdrawn from all Katrina litigation.
Scruggs' indictment has left many who know him astounded and perplexed. "The whole thing is a shock," says R. Eric Kennedy of Cleveland's Weisman, Kennedy & Berris, who has worked with Scruggs as a plaintiffs lawyer and has also dealt with Scruggs as an adversary. "He is the epitome of honesty and honor. He's a pretty stubborn guy about doing things the right way. ... He's never been close to the line. Not even close." Papantonio, who has worked besides Scruggs on several cases, finds it hard to believe that he would risk his livelihood for a dispute over fees that are paltry compared to his wealth. "Ten to 15 million dollars doesn't change his life," Papantonio says.
Even if Scruggs is exonerated, it may be hard for him to revive a career marked recently by good intentions and disappointing results.