Published: 8:51 p.m. Saturday, Sept. 3, 2011

When Texas Attorney General Greg Abbott announced earlier this year the settlement of a big Medicaid fraud case against two drug companies that netted the state a record $56.5 million, he didn't mention that nearly one-third of the money $17.3 million didn't go to taxpayers. Instead it went to an Austin law firm that handled the cases for his office.

Nor did he reveal that the same firm will receive millions more for its work on the case against a third pharmaceutical company, now in final negotiations.

In all, Wright & Greenhill — using a legal team headed by a former assistant attorney general — stands to earn about $30 million in contingency fees from an unusual contract signed in 2007 to provide outside legal services to Abbott's office.

The Texas attorney general's office, with 698 lawyers on staff, occasionally hires private lawyers but, except for this contract, Abbott has never done so on a contingency basis. In his request to the Legislative Budget Board — required for all state contingent fee contracts — Abbott said he didn't have the manpower to handle the complex fraud case, nor enough money to hire outside counsel at hourly rates.

Lawyers who work on contingency are paid only when they win; their fee comes out of the court-ordered damages or settlement, typically about 30 percent. Damages sought in government Medicaid fraud cases against giant drug companies often run in the hundreds of millions of dollars, so the lawyers' take is sizeable. Thus using a private law firm reduced the return to the public treasury .

Attorneys general in Florida and California — the other states involved in the 2007 fraud case against pharmaceutical giants Sandoz, Mylan and Teva — handled the legal work in-house instead of contracting it out, and thus did not have to split their share of the awards with a law firm.

"We are not aware of any cases in the past 10 years where the attorney general's office hired private counsel on a fee contingent basis," said Lynda Gledhill, press secretary for California Attorney General Kamala Harris. "We utilize our lawyers unless there is a very specific reason not to."

The Wright & Greenhill deal also is unusual from a political standpoint. Contingency fees are the lifeblood of plaintiffs' lawyers, who sue large companies on behalf of individuals or groups of people and trend Democratic. They also are criticized by the business lobby and are a perennial target of tort reform measures.

Abbott and his predecessor, U.S. Sen. John Cornyn, both Republicans, have publicly objected to contingency fees in other instances.

"I have long argued that these types of outsourced contingent-fee arrangements are inherently unethical and inevitably lead to the appearance of public corruption," Cornyn said in a letter to his Senate colleagues in May, when he objected to the nomination of a New Jersey plaintiffs' lawyer to a federal judgeship.

Joe Crawford, the lead attorney handling the Medicaid cases at Wright & Greenhill, worked for Cornyn as a special assistant between 2000 and 2002, when Cornyn was attorney general. He declined to talk to the American-Statesman, citing a clause in the state's contract that requires outside counsel to refer all media inquiries to the attorney general's office. Cornyn also declined to comment.

Abbott spokesman Jerry Strickland said in an email that the attorney general's office needed to employ the law firm in 2007 "because a backlog of cases and an understaffed Medicaid fraud section prevented the state from more quickly recovering significant Medicaid overpayments for Texas taxpayers."

Former Assistant Attorney General Pat O'Connell, who handled the state's civil Medicaid fraud cases at that time with two to three other attorneys, also defended the decision to hire Wright & Greenhill.

"I was working like crazy," he said. "If I was still doing things over there, they would have hired more (outside) lawyers. Texas' aggressive pursuit (of these cases) caused more defendants to settle."

Strickland said that after 2007, no more outside lawyers were needed because Abbott successfully lobbied the Legislature for more money to prosecute Medicaid fraud. The Medicaid fraud division for civil matters now has 31 attorneys; a separate unit funded mostly with federal money has 14 lawyers and 85 investigators working on criminal matters.

But Wright & Greenhill had previously done similar legal work for the state, for far less money. An earlier contract with the attorney general's office — based on hourly legal fees rather than a contingency fee — was signed in January 2003, after Abbott succeeded Cornyn and Crawford had re-joined the Austin law firm.

That contract called for Crawford to supervise the state's first big pharmaceutical pricing case — against Dey Laboratories and several other drug makers — which he had worked on as Cornyn's special assistant.

Although O'Connell was working on the same case at the attorney general's office, he said he had not been aware of the arrangement, which paid Wright & Greenhill $645,000 in legal fees. Though more than Crawford's annual state salary ($108,000, according to Texans For Public Justice, which obtained pay information on several of Cornyn's hires), it was a fraction of what a contingency fee would have cost the state when the litigation was settled two years later, netting Texas $13.6 million from the drug companies.

"Joe is a straight shooter," O'Connell said. "I just don't know what he was doing after he left the attorney general's office. (But) whatever we paid Joe, we got back in settlement. The state was not out any money."

Both contracts, Strickland said, were "smart" decisions that " ultimately led to a solid return on the investment."

Big business

Along with cyber crimes and child pornography, Medicaid fraud has been a major focus of Abbott's. The attorney general's office has been among the most aggressive prosecutors of companies that bilk the federal/state program that provides health care for disabled and low-income Texans, primarily children.

"They have been a leader in this particular field," said John Clark, a San Antonio attorney who represents Ven-A-Care, a Florida pharmacy that also has had a central role in the litigation.

That's partly because Texas is a populous state, with a big investment in Medicaid. Although the state has one of the lowest Medicaid doctor reimbursement rates in the country, the program costs Texas taxpayers $10 billion a year — 17 percent of state-funded spending. Its total Medicaid expenditures are exceeded only by New York and California.

The flurry of Medicaid fraud cases began more than a decade ago, based on longstanding complaints by Ven-A-Care that giant drug companies were inflating the wholesale prices on which the government based its reimbursements for medications. The pharmacy has joined with states and the U.S. Department of Justice to file "qui tam" lawsuits — legal actions brought by citizens with evidence of fraud against the government — against dozens of major drug companies. In return, Ven-A-Care receives a share of any settlements or jury awards.

So far, Ven-A-Care has reaped more than $380 million for its efforts; state and federal governments have collected about $2.2 billion. "Both in recoveries for themselves and for taxpayers, Ven-A-Care's partners are apparently the most successful whistle-blowers in U.S. history," the Los Angeles Times reported in January.

Texas was one of the first states to follow Ven-A-Care's lead, and the 2007 lawsuit handled by Wright & Greenhill is one of 11 that originated with the whistleblower. It accused Sandoz, Mylan Pharmaceuticals and Teva Pharmaceuticals of concealing the true prices of prescription drugs sold to pharmacies such as CVS and reimbursed by Medicaid.

Mylan and Teva settled their cases in 2010, and Wright & Greenhill collected its $17.3 million fee from the state of Texas in June 2011. A settlement with Sandoz will send another $12.5 million Wright & Greenhill's way.

Big risk, big payoff

For individuals or small companies such as Ven-A-Care, contingency fees are "the only feasible way" to afford legal representation when challenging multi-national corporations with deep pockets, said Clark.

"It's a risky venture," he said. "It's terribly expensive. Out-of-pocket expenses can easily run into seven figures."

Qui tam lawsuits in particular can take years to resolve, and law firms that specialize in them spend considerable sums up front, with no payment unless they prevail. In Wright & Greenhill's case, it took four years to get paid — a long time for a relatively small law firm accustomed to billing as it goes.

"Wright & Greenhill sustained serious financial strain in reviewing more than 5 million documents, conducting depositions across the country — even laying off staffers and nearly shutting down their practice because of the financial burden," said Strickland.

For governments with many staff attorneys working on salary, however, the risk of taking on such cases has been far outweighed by the payoff. Since 2004, Abbott's office has recovered $358 million from "Big Pharma" companies. About two-thirds of that money went back to the federal government and Ven-A-Care. The rest — $121 million — went into the state's coffers, a significant portion of the $260 million recovered for the state from all civil Medicaid fraud actions undertaken by Abbott's office.

Wright & Greenhill's $17.3 million fee came from that money. So, unlike the other two states involved in the same litigation, Texas in effect paid two contingency fees — one to Ven-A-Care and one to an outside law firm.

In Texas, such fees have a scandalous past, due to fallout from the state's $17 billion settlement with tobacco companies in 1998. As attorney general, Cornyn investigated the $3.3 billion in contingency fees that the state paid to a group of private lawyers known as the Tobacco Five under his Democratic predecessor, Dan Morales, who eventually went to federal prison for trying to divert settlement money to an associate.

As a result, the Legislature in 1999 cracked down on contingency fees paid by state agencies, capping the amounts at 35 percent of a settlement or award, making them subject to public disclosure and requiring approval by the Legislative Budget Board. The Texas law is considered a model by the U.S. Chamber of Commerce and other business groups alarmed by the practice of states using outside legal help to bring actions against businesses for violating antitrust, consumer protection and false claims laws.

Both Cornyn and Abbott have continued to criticize contingency fee arrangements. In May, Cornyn tried to rally support for a Senate filibuster against the nomination of Jack McConnell to a federal judgeship in Rhode Island, citing in part the "windfall" fees paid to McConnell's law firm by several states in the tobacco litigation, including Texas. The filibuster failed, and McConnell was confirmed.

Cornyn also has tried to bar all state attorneys general from hiring lawyers on a contingency basis to enforce federal consumer protection laws. Speaking on the Senate floor in 2009 for his amendment to the Truth in Lending Act, Cornyn said, "The new causes of action created by this bill could add up to significant money damages, and this money should be paid to the people, not to private lawyers." The amendment failed.

In 2008, Abbott took exception to the $688 million in legal fees awarded to lawyers who brought a class action suit against financial institutions implicated in the collapse of Enron. A Houston federal judge found that the fees, amounting to less than 10 percent of the record $7.2 billion settlement, were not only reasonable but "a deal."

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About this story

The State of Texas generates volumes of reports each year on how it spends its money, and sifting through the data is one of the jobs of watchdog journalism. In a recent check of state contracts, the American-Statesman discovered a surprising item: a $17.3 million payment from the Texas Attorney General's office to a local law firm. We wondered why the state's largest law office spent that kind of money for outside legal help.