How to Be Ready for Wildfires

By David B. Rivkin, Jr., and Robert A. Julian

March 11, 2024, in the Wall Street Journal

The September 2020 Archie Creek Complex Fire in Douglas County, Ore., destroyed 138 houses, more than 100,000 acres of land and an entire fishing ecosystem. Hundreds of families lost everything in the blaze and have had to live the past 3½ years, much of it in a Covid lockdown, in trailers.

Three government reports found that Berkshire Hathaway Energy’s PacifiCorp caused the fires. But PacifiCorp has delayed paying victims for their losses. Seventeen Douglas County homeowners have died waiting for a judge to give them a trial date. The Oregonian reported a year ago that the claims were “moving through the court system at a glacial pace, leaving thousands of victims in a debilitating state of financial and emotional uncertainty.” It wasn’t until December that PacifiCorp, facing trial, settled the homeowners’ and timber companies’ claims for $250 million.

Douglas County isn’t alone. Since 2017, wildfires have burned millions of acres, destroyed more than 30,000 homes, and killed more than 235 people in California, Oregon and Hawaii. Damages—economic losses and personal injury—are in the billions of dollars. When old equipment fails because of high velocity windstorms, firefighters simply can’t get to the fires in time.

PacifiCorp went from earning $921 million in 2022 to losing $468 million in 2023, a financial shellacking driven by $1.6 billion in wildfire-related charge-offs. Fires have taken a heavy toll on other investor-owned electric utilities, as Warren Buffett noted in his recently released annual letter to Berkshire Hathaway shareholders. Mr. Buffett argued that investor-owned utilities in many states are unable to raise sufficient capital and are facing bankruptcy. Their customers will experience higher rates and less reliable service.

One reason that utilities face this industrywide crisis is that too many public-utility commissions, or PUCs, require them to fund green projects instead of hardening electrical lines, clearing above-ground lines of vegetation, and creating an emergency shut-off system that would reliably cut power during dangerous storms.

Another problem is the interminable delays in dealing with wildfires’ consequences. There is no evidence that Oregon’s governor, Legislature, PUC or district attorneys have taken any action to determine PacifiCorp’s responsibility for igniting the fires that raged in more than a dozen Oregon counties. Victims’ lawyers have secured judgments against PacifiCorp for recklessly and willfully causing four of the 2020 Northern Oregon fires that didn’t involve the Douglas County fires, but the state government has been missing in action.

California, with a political and regulatory culture similar to Oregon’s, has done better. The California Department of Forestry and Fire Protection, which is responsible for fire protection on state lands, promptly issued reports, finding that California’s largest electric utility, Pacific Gas & Electric, had ignited most of that state’s fires in 2017 and 2018. While this liability plunged PG&E into bankruptcy, many state agencies worked together to ensure that the legal proceedings moved quickly so that victims could obtain timely relief.

District attorneys in seven counties prosecuted PG&E for killing 84 people in the 2018 Camp Fire and structured three civil settlements of its responsibility for three other post-2018 fires. The California PUC investigated the 2017 and 2018 fires, issued a scathing report on the utility’s disregard for safety, and fined PG&E $1.9 billion. The company pleaded guilty to 84 counts of manslaughter, agreed to satisfy the PUC’s fine, and paid roughly $129 million to local jurisdictions pursuant to the district-attorney-driven settlements. The California Legislature adopted an emergency measure establishing a utility-funded wildfire fund to resolve future wildfire claims and encourage PG&E to resolve its claims within 18 months. Gov. Gavin Newsom signed the legislation and then guided PG&E, the PUC, the victims’ lawyers, the shareholders and the courts to resolve the case and pay out a record $13.5 billion to the victims.

Oregon’s government hasn’t done anything similar for its citizens. The situation appears to be the same in Hawaii, where the local utility, Hawaiian Electric, seems to be on the same litigation defensive after the August 2023 Maui fires.

There is a set of straightforward solutions that requires all parties to adopt best practices, resolve legal battles expeditiously and compensate victims promptly. As a first step, state legislatures should direct and fund their agencies to investigate and issue prompt reports on the cause of wildfires. The states should adopt wildfire-fund legislation similar to California’s emergency law that permitted PG&E to reorganize and stabilize the utility market. But states shouldn’t exonerate and protect the utilities from liability for their destruction of the land and homes and killing and injuring people.

Legislatures should create a legal docket system that resolves utility-caused fire claims in a single coordinated proceeding, on a one-year timetable to trial. Utilities should be legislatively pushed to resolve claims within 12 months, via wildfire-fund mechanisms, rather than engage in a prolonged legal fight. And state judges should set trial dates within a year of the claim filing until the legislatures adopt the 12-month legal docket system.

State legislatures should also strip away governmental immunity from PUCs and subject them to liability, creating a powerful incentive for balancing climate-change and fire-safety considerations in the public interest. Finally, states should require utilities to replace their unsafe old equipment by set dates. The end of 2024 would be a reasonable target. This would be expensive, but the costs of the status quo are far greater.

Windstorms will continue, and the aging and increasingly dangerous electric-utility infrastructure will cause fires. Governments and utilities must join together to take necessary measures to update their equipment and ensure that those who suffer injury or loss are quickly and completely compensated.

Messrs. Rivkin and Julian are attorneys based respectively in Washington and San Francisco. They represented the Tort Claimants Committee in the PG&E bankruptcy case and now represent homeowners, commercial landowners and wineries in their litigation against PacifiCorp in Oregon.


Why Samuel Alito Shuns the State of the Union

He found the partisan spectacle distasteful even before Obama’s inaccurate declamation about the Supreme Court in 2010.

By David B. Rivkin, Jr., and James Taranto

March 6, 2024, in the Wall Street Journal

Justice Samuel Alito’s first State of the Union address was a happy occasion, but things went downhill after that. “The Supreme Court now has two superb new members,” President George W. Bush told the nation on Jan. 31, 2006. Justice Alito had been confirmed that same day, Chief Justice John Roberts four months earlier. Both were in the audience—justices get front-row seats—and both eventually came to regard the annual ritual as a burden. Justice Alito hasn’t attended one since 2010.

“Unless you’re there on the floor, you don’t really appreciate what’s going on,” Justice Alito told the Journal in an interview last spring. “The members [of Congress] are extremely vocal. . . . I remember during one where President Bush was speaking, and the leaders behind us were saying, ‘Bulls—! That’s bulls—!’ They’re always making these comments, and loud enough so you could hear it two or three rows away.”

That’s awkward for members of the court, whose official role requires them to rise above partisanship. Applause lines are even trickier, since silence can seem like dissent. “We sit there like potted plants, and then we look out of the corner of our eye to see whether any of our colleagues are going to stand up, or the Joint Chiefs are,” Justice Alito said. “There are some times when you have to stand up. Like, ‘Don’t we honor the brave men and women who are fighting and dying for this country?’—you can’t not stand up for that. But then you say, ‘Isn’t the United States a great country’—you stand up—‘because we are going to enact this legislation’—maybe you have to sit down.”

In January 2010, the court itself became the target of a presidential declamation. “With all due deference to separation of powers,” President Barack Obama said, “last week the Supreme Court reversed a century of law that I believe will open the floodgates for special interests—including foreign corporations—to spend without limit in our elections.”

As Democratic lawmakers arose behind the justices and clapped, TV cameras caught Justice Alito shaking his head and mouthing the words “not true.” He was right, as even the New York Times’s Linda Greenhouse acknowledged. Citizens United v. FEC didn’t touch the Tillman Act of 1907, which to this day prohibits corporate campaign contributions. It struck down provisions of a different law, enacted in 2002, and overturned precedents dating only to 1990 and 2003.

Justice Alito was surprised by Mr. Obama’s error. “I imagine the State of the Union speech is vetted inside out and backwards,” he told us. “Somebody should have seen that this statement was inaccurate.” He also failed to realize he was on camera: “My mistake was that I didn’t think about the fact that the text is distributed to the media ahead of time. They knew that the president was going to talk about the Supreme Court, so they had their cameras on us. . . . That’s why it’s a sore point.”

Justice Alito isn’t the first member of the court to shun the State of the Union. John Paul Stevens never attended. Antonin Scalia last went in 1997, Clarence Thomas in 2006. “It has turned into a childish spectacle,” Scalia said in 2013. “I don’t want to be there to lend dignity to it.”

Chief Justice Roberts was only a little less pointed in March 2010, six weeks after the Obama-Alito kerfuffle. “The image of having the members of one branch of government standing up, literally surrounding the Supreme Court, cheering and hollering, while the court, according to the requirements of protocol, has to sit there expressionless, I think is very troubling,” he told students at the University of Alabama Law School. “To the extent the State of the Union has degenerated into a political pep rally, I’m not sure why we’re there.”

The chief justice has nonetheless continued to attend and is expected to do so again on Thursday night. As with those applause lines, you can’t even abstain without making a statement.

Mr. Taranto is the Journal’s editorial features editor. Mr. Rivkin practices appellate and constitutional law in Washington.


Why the Supreme Court Had to Hear Trump’s Case

By David B. Rivkin, Jr., and Elizabeth Price Foley

February 29, 2024, in the Wall Street Journal

Many observers thought the Supreme Court would decline to consider Donald Trump’s claim that presidential immunity shields him from prosecution for his conduct on Jan. 6, 2021. But on Wednesday the justices announced that they will hear the former president’s case in April. Mr. Trump could eventually face a trial on those charges, but the justices had little choice but to take up this question because the lower court’s ruling was so sweeping and dangerous.

Mr. Trump claims that his allegedly criminal actions were “official acts” taken as president. The U.S. Circuit Court of Appeals for the District of Columbia held that it didn’t matter if they were—that no president is entitled to immunity from “generally applicable criminal laws.” That decision violates the separation of powers, threatens the independence and vigor of the presidency, and is inconsistent with Supreme Court precedent.

The justices are unlikely to decide whether Mr. Trump’s actions were in fact “official acts.” Instead, they will consider the key legal question, “whether and if so to what extent does a former president enjoy presidential immunity from criminal prosecution for conduct alleged to involve official acts during his tenure in office.”

That’s a novel question, but in Nixon v. Fitzgerald (1982), the high court held that a president enjoys absolute immunity from civil suits predicated on his “official acts,” even if they fall foul of “federal laws of general applicability.” Justice Lewis Powell wrote that such immunity is a “functionally mandated incident of the President’s unique office, rooted in the constitutional tradition of the separation of powers and supported by our history.” Such lawsuits “could distract a President from his public duties, to the detriment of not only the President and his office but also the Nation that the Presidency was designed to serve.”

Mr. Trump maintains that he believed the 2020 presidential election was riddled with fraud and that his conduct on Jan. 6 was fully consistent with his constitutional obligations to “take care that the laws be faithfully executed.” Whatever the merits of that claim, it raises weighty questions of law and fact that the D.C. Circuit was wrong to brush aside—most centrally, that the president’s power is granted by the Constitution, which, as the supreme law of the land, overrides ordinary, “generally applicable” statutes.

The D.C. Circuit decision opened the door to all manner of constitutional crises. A former president could be prosecuted for ordering a military attack on an American affiliated with a foreign terrorist organization, even though such an order is clearly within his authority as commander in chief. Aggressive prosecutors motivated by ideology or partisanship could use capaciously worded criminal statutes—including those regarding mail or wire fraud, racketeering, false statements and misrepresentations—to challenge almost any presidential action, including those related to national security activities.

As with civil suits, it isn’t enough to say that the former president would have the opportunity to mount a defense in court. The mere possibility of personal prosecution for official actions would chill future presidential decisions. The D.C. Circuit casually disregards this danger, asserting simply that the “public interest” in prosecuting crimes is weightier than the risk of chilling impartial and fearless presidential action. It asserts that a president wouldn’t be “unduly cowed” by the prospect of criminal liability, “any more than a juror” or “executive aide” would be. That analogy is inapt because the president’s responsibilities are much weightier than those of jurors or aides. He alone is the singular head of a constitutional branch of government. As the justices recognized in Nixon v. Fitzgerald, the “greatest public interest” isn’t in enforcing ordinary statutes against the president. Immunity is necessary to ensure he has “the maximum ability to deal fearlessly and impartially with the duties of his office.”

The D.C. Circuit dismissed as “slight” the risk that former presidents will be politically targeted because prosecutors “have ethical obligations not to initiate unfounded prosecutions” and there are “additional safeguards in place,” including the requirement of seeking an indictment from a grand jury. These arguments border on frivolous. Not all prosecutors are ethical, and even those who are may be overzealous. Many cases have featured prosecutorial misconduct or abuse. And the justices have surely heard the saying that a prosecutor can indict a ham sandwich. Lawyers in civil cases are also bound by ethical obligations, but that didn’t vitiate the case for presidential immunity in 1982.

Jack Smith, the special counsel in the Trump cases, has asserted that federal prosecutors make decisions without regard to politics—but his conduct in this case belies that claim. His chief argument against Mr. Trump’s petition for a stay of the D.C. Circuit’s decision denying his immunity was that such a delay would cause “serious harm to the government—and to the public” because the case “presents a fundamental question at the heart of our democracy.” Many Supreme Court cases raise such questions, and Mr. Smith avoids saying what distinguishes this one. The obvious answer is the election timetable.

Mr. Smith’s demand for fast-tracking the Supreme Court’s consideration thus contradicts the D.C. Circuit’s suppositions about prosecutorial ethical probity. Trying Mr. Trump, the all-but-certain Republican nominee for president, before the election is inconsistent with Section 9-27.260 of the Justice Department’s Justice Manual, which makes clear that prosecutors “may never make a decision regarding . . . prosecution or select the timing [thereof] . . . for the purpose or affecting any election, or for the purpose of giving an advantage or disadvantage to any candidate or political party.”

The question of presidential immunity is an important one for our constitutional democracy of separated government powers, and the D.C. Circuit made a grievous error in disposing of it so casually. The justices were right to halt the proceedings until they can give the issue the careful consideration it deserves.

Mr. Rivkin served at the Justice Department and the White House Counsel’s Office during the Reagan and George H.W. Bush Administrations. Ms. Foley is a professor of constitutional law at Florida International University College of Law. Both practice appellate and constitutional law in Washington.


Colorado Can’t Disqualify Trump

Applying the Insurrection Clause to the presidency would have given rogue states too much power.

By David B. Rivkin, Jr., and Lee A. Casey

February 7, 2024, in the Wall Street Journal

The case of Trump v. Anderson, in which Donald Trump asks the Supreme Court to reverse a ruling that bars him from Colorado’s presidential ballot, raises many complicated legal and factual questions. The justices should ignore them and decide a simple one: Does Section 3 of the 14th Amendment, which disqualifies certain former officeholders who have “engaged in insurrection,” apply to the presidency?

As Michael Mukasey has argued in these pages, the answer is no. Those who are covered by the Insurrection Clause are specifically disqualified from serving as members of Congress or the Electoral College—not as president or vice president. They are also barred from state office and from “any office, civil or military, under the United States.” But “any office” refers to appointive posts such as judges, generals and cabinet secretaries, and “officers of the United States” are appointed, not elected.

This raises an obvious question: Why would the authors of the 14th Amendment exclude the presidency? For two compelling and practical reasons, which reinforce Section 3’s plain meaning.

First, by the time the amendment was ratified in 1868, the states had largely adopted a system whereby presidential electors, instead of being appointed by state legislatures, were chosen by popular vote after committing to a particular candidate. If no former Confederates (or more modern insurrectionists) could stand for election as presidential electors, there would be little chance of an insurrectionist president. (As Mr. Mukasey also observed, if the president were covered, there would be no reason to cover presidential electors, who wouldn’t be able to elect an insurrectionist if they wanted to.)

Second, there was no way to cover the presidency without violating the Constitution’s established federalism principles, which require states to act uniformly when dealing with federal laws and institutions. These principles are at the root of several constitutional provisions, including the equal representation of states in the Senate, the Supremacy Clause and the Full Faith and Credit Clause. These provisions are indispensable in making the federal republic functional.

Applying Section 3’s disqualification to the presidency would create exactly the uniformity problem the Supreme Court now faces—different states reaching different conclusions about what is and isn’t an insurrection in the context of a national election.

There is ample evidence that the 14th Amendment’s drafters paid great attention to federalism concerns. This is particularly true regarding the amendment’s first two sections, which dramatically reshaped the relationship between U.S. citizens and the federal and state governments by requiring states to respect federal constitutional rights. As legal scholar Kurt T. Lash recounted in “Federalism and the Original Fourteenth Amendment,” a 2019 article, radical Republicans, who favored stronger federal power, clashed with moderate Republicans determined to preserve states’ rights under the Constitution’s original Madisonian federalism architecture. It is implausible that they would have fought hard to protect federalism while permitting each state to determine presidential disqualification for itself.

In U.S. Term Limits v. Thornton (1995), the Supreme Court held that states couldn’t impose their own qualifications on members of Congress. Justice John Paul Stevens’s majority opinion discussed at length how elections to the national legislature involved the people of the U.S. rather than citizens of each state, requiring that qualifications be nationally uniform. This logic is even more compelling when it comes to the president, who is elected by the entire nation. As Alexander Hamilton wrote in Federalist No. 68, the Framers made the “appointment of the president” depend “in the first instance to an immediate act of the people of America, to be exerted in the choice of persons for the temporary and sole purpose of making the appointment”—members of the Electoral College.

The Constitution authorizes state legislatures to determine how presidential electors are selected—and even to appoint them directly, as Colorado did in 1876—and the qualifications for serving as president are stated in the constitutional text. There is no indication that the states may interpret these for themselves. Stevens wrote that while states can adopt “election procedures” (his emphasis) that govern access to the ballot—such as signature requirements for independent candidates or “sore loser” provisions that bar a third-party run by a former candidate for a major-party nomination—they can’t set or revise qualifications for federal office.

Some of Mr. Trump’s opponents have pointed hopefully to Hassan v. Colorado, a 2012 decision of the 10th U.S. Circuit Court of Appeals in which then-Judge Neil Gorsuch upheld the state’s authority to bar from the ballot a naturalized citizen who wanted to run for president. Abdul Karim Hassan asserted an eccentric theory that the 14th Amendment vitiated the requirement that the president be a natural-born citizen. Judge Gorsuch ruled that “a state’s legitimate interest in protecting the integrity and practical functioning of the political process permits it to exclude from the ballot candidates who are constitutionally prohibited from assuming office”—not that state officials or judges could decide what the qualifications for federal office are.

The meaning of “natural-born citizen” is open to dispute in certain unusual cases involving would-be candidates born overseas to American parents or in unincorporated U.S. territories (where the Constitution doesn’t fully apply). If such a dispute arose and states responded to it differently, the federal courts would have to intervene quickly to impose uniformity. To avoid precisely that sort of situation, the drafters of the 14th Amendment left the presidency out of Section 3.

A Supreme Court decision to that effect would be consistent with the doctrine that judges should avoid deciding constitutional issues unnecessarily. Was the riot of Jan. 6, 2021, an “insurrection”? If so, what does it mean to have “engaged” in it? Does disqualifying someone from office require an act of Congress or a criminal conviction? These questions may be pertinent in future cases, but not in Trump v. Anderson.

Messrs. Rivkin and Casey practice appellate and constitutional law in Washington. They served at the Justice Department and the White House Counsel’s Office in the Reagan and George H.W. Bush administrations.


Chevron Deference Is a Case of Too Much Judicial Restraint

The precedent strips judges and lawmakers of legitimate power and hands it to bureaucrats.

By David B. Rivkin, Jr., and Andrew M. Grossman

16 January 2024 in the Wall Street Journal

Conservatives often criticize liberal jurists for “judicial activism”—disregarding laws passed by elected legislators and imposing their own policy preferences instead. On Wednesday the Supreme Court will consider whether to overturn a precedent that went too far in the other direction by surrendering the judicial role of interpreting the law and handing it to unelected bureaucrats and agency heads.

Loper Bright Enterprises v. Raimondo is a case about fishing regulation. The National Marine Fisheries Service issued a rule requiring the plaintiffs to pay the costs of carrying federal conservation monitors aboard their vessels. The fishermen argued that the service had no legal authority to do so, but the high court’s precedent in Chevron v. NRDC (1984) obligated the U.S. Circuit Court of Appeals for the District of Columbia to defer to the government’s interpretation of an “ambiguous” statute.

Chevron was an “accidental landmark,” as legal scholar Thomas Merrill put it in 2014. At issue in the case was a Clean Air Act regulation interpreting the term “stationary source” to refer to an entire facility rather than a single smokestack. This definition enabled facilities to make changes that didn’t increase their total pollution without triggering onerous permitting requirements for “new or modified” sources. The justices upheld the regulation, deferring to the agency’s interpretation of “ambiguous” text.

For as long as they’d had the power to do so, federal courts interpreted statutes for themselves where necessary to decide a case, including in cases challenging agencies’ positions on the laws they administer. Chevron superseded that approach with a blanket rule of deference.

It’s unclear if the high court intended this fundamental change. Chevron’s author, Justice John Paul Stevens, regarded the decision as ordinary pragmatism: “When I am so confused, I go with the agency,” he told his colleagues as they discussed the case in conference.

By all indications, Chevron’s reasoning was driven by the need to assemble a court majority on a difficult interpretive question. That explains the decision’s failure to grapple with the obvious consequences of its logic. The Constitution vests the “judicial power” in the courts. “It is emphatically the province and duty of the judicial department to say what the law is,” as Chief Justice John Marshall wrote in Marbury v. Madison (1803). Chevron bucked that constitutional command without acknowledging that it did so.

Chevron deference also conflicts with the Administrative Procedure Act of 1946, which provides that a “reviewing court shall decide all relevant questions of law” and “interpret constitutional and statutory provisions.” Chevron doesn’t cite the APA.

While few appreciated Chevron’s import when it was handed down, its potential was apparent to the Justice Department. The Reagan administration seized on the decision as a corrective to the judicial activism of lower courts, especially the D.C. Circuit, in blocking its deregulatory agenda. The Chevron doctrine bulldozed the policy-driven obstacles courts had thrown up to block regulatory reforms. It gained adherents among newly appointed textualist judges like Antonin Scalia and Kenneth Starr on the D.C. Circuit, who favored judicial restraint.

But over the years Chevron became less about judicial restraint and more about agency dominance. With the movement toward textualism, led by Justices Scalia and Clarence Thomas, courts gradually returned to constrained formalism in interpreting statutes. Armed with the Chevron doctrine, however, the administrative state learned to wield its new interpretive power to maximum effect.

Deference might have been relatively harmless if agencies engaged in a good-faith effort to carry out unclear statutes. But beginning in the Clinton administration, Chevron changed the way they go about their business. Instead of asking what Congress meant, agency lawyers and decision makers hunt for ambiguities, real or imagined, to justify their policy objectives.

As agencies relied more on Chevron to pursue policy agendas, judges were forced to confront a greater range of asserted “ambiguities” with no standard to distinguish among them. Judicial review is the essential check on executive overreach, yet Chevron put a brick on the scale by committing the courts to favor the government’s positions. It is all too easy for courts, when faced with difficult or contentious interpretive questions, to waive the ambiguity flag and defer.

By aggrandizing the power of unelected bureaucrats, the Chevron doctrine also diminishes Congress. Witness the unseemly but now-routine spectacle of lawmakers hectoring the president and agencies to enact policy programs—from student-loan forgiveness to the expansion of antitrust law and greenhouse gas-regulation—rather than legislating themselves. The prospect of achieving an uncompromised policy win through executive action has replaced the give-and-take of the legislative process.

But the victories achieved in this fashion are only as durable as the current administration, and each new president takes office with a longer list of “day one” executive actions to reverse his predecessor and implement his own agenda. Donald Trump raised hackles last month when he said he would be a “dictator,” but only on “day one.” He was describing the post-Chevron presidency.

The principal argument of Chevron’s defenders is “reliance.” Ending deference to agencies, they say, would create regulatory uncertainty and threaten the viability of the administrative state. But what reliance interest can there be in a doctrine that empowers agencies to change course on a political whim, over and again?

The Supreme Court has already been moving away from Chevron deference, which it hasn’t applied since 2016. The Covid pandemic heightened the need for agency flexibility, yet none of the justices’ pandemic-policy decisions resorted to deference. In recent years, 13 states have rejected Chevron-style deference in interpreting state law without consequence.

Chevron’s rule of deference is an abdication of judicial duty, not an exercise in judicial restraint. It has proved unworkable and corrosive to the constitutional separation of powers. Forty years later, the court should correct its mistake.

Mr. Rivkin served at the Justice Department and the White House Counsel’s Office in the Reagan and George H.W. Bush administrations. Mr. Grossman is a senior legal fellow at the Buckeye Institute and an adjunct scholar at the Cato Institute. He filed a friend-of-the-court brief in support of the petitioners in Loper Bright. Both authors practice appellate and constitutional law in Washington.


Trial Lawyers Are Wrecking the Bankruptcy System

Defendants and plaintiffs alike suffer from the abuse. The only beneficiaries are the plaintiffs’ attorneys.

By David B. Rivkin, Jr., And Laurence A. Friedman

January 4, 2024, in the Wall Street Journal

Mass tort exposure has created an epidemic of bankruptcies, affecting organizations from Johnson & Johnson (talcum powder) to the Boy Scouts (sexual abuse). The way this process has unfolded is causing the federal bankruptcy system to come apart, harming the plaintiffs and bankrupt entities alike. Nobody benefits but the plaintiff lawyers.

Trial lawyers have found an opportunity to exploit the traditional bankruptcy claims process through the use of well-honed mass tort shakedown strategies. The scheme is simple but damaging. Plaintiff lawyers invest in a flurry of marketing through social media, TV and radio ads, often using professional “lead generation” companies, to identify the maximum number of potential tort claimants.

These claims can’t be fully verified, challenged or adjudicated within the framework of bankruptcy proceedings. Their proliferation siphons off tremendous resources from companies that are already in financial distress, compromising their ability to emerge from bankruptcy and short-changing established creditors, including earlier plaintiffs. As a lawyer for one of the Boy Scouts’ insurers told the press in 2021: “Allowing invalid and fraudulent claims will hurt valid survivors of sexual abuse by delaying and diluting any compensation they would receive.”

The bankruptcy reorganization process involves restructuring a company in a manner that maximizes its value, then distributes that value efficiently to creditors (including employees, bondholders and vendors) through a court-approved plan, thus staving off liquidation. This is possible because creditors and other stakeholders have predictable expectations of how the bankruptcy will proceed and their claims will be treated.

Creditors often must accept less than their original claims. But the process keeps the organization running, protecting jobs by putting its business operations on a sound financial footing again. Sometimes creditors are assigned ownership in a reorganized company, giving them a stake in a reasonably prompt and efficient resolution of bankruptcy.

But when the trial lawyers bring their “claims” to the table, all bets are off. Insurance companies, creditors, the bankrupt entity and sometimes its principals are forced back to the drawing board. The trial lawyers then typically offer an “easy” solution: create a separate bucket of cash to be held in trust as the sole source for resolution of the mass tort claims (including lawyer fees). Since the voting power in the reorganization plan approval process is driven by the aggregate amount of each creditor’s claims, claim proliferation gives disproportionate powers to the plaintiff tort lawyers.

The Boy Scouts of America bankruptcy in Delaware is a perfect example. At the time of the initial bankruptcy filings in 2020, the number of actual lawsuits filed by abuse claimants was less than 300 and expected to grow to about 2,000. Then the mass-tort lawyers brought more than 80,000 new, unadjudicated sexual-abuse claims into the case. If the judge allows final plan approval taking into account these new claims, the result will dilute the funds available to the original victims whose suits were the impetus for the bankruptcy filing in the first place. Their expected payouts could be reduced from $1.2 million to $30,000 a claim.

In the Johnson & Johnson bankruptcy case, the first set of trial lawyers objected to the original reorganization plan and extracted an agreement to increase the pot of settlement money from $4 billion to more than $9 billion. Then a different set of mass tort lawyers objected to this second attempt to resolve the claims. Result: chaos, with the second bankruptcy now on appeal, the company contemplating a third, nothing conclusively resolved, and potential for ever more filings going forward.

The mass-tort lawyers use sophisticated lead-generation algorithms to capture potential claimants by promising lottery-size payouts. A sampling of solicitations on the web for those wondering if they may have a claim against Johnson & Johnson is instructive. Preliminary questions suggest that if you have been diagnosed with cancer, you may have a claim—even if you didn’t use the product but someone in your home did.

Another site suggests that the average judgment in a talc-related claim is $4.4 million. Yet simple math tells us that if the $9 billion proposed settlement is divided by the number of current claims—60,000—the average payout is more like $150,000. Legal and administrative fees can eat up 40% of that. The Federal Trade Commission would ordinarily bring enforcement cases against businesses putting out such misleading advertisements.

Congress could come up with systemic solutions to the claims-proliferation problem, but that seems unlikely given political gridlock and trial lawyers’ clout. The Judicial Conference of the U.S., which prescribes the official rules and forms governing bankruptcy practice and procedure, is a more viable avenue for reform.

The Judicial Conference could quickly change the claim forms to require greater upfront disclosures—including requiring submission of a specific diagnosis linking the claim to the alleged tort, as well as disclosure of any relationship between the doctor giving the diagnosis and the lawyers—and heightened certification requirements for lawyers and others who help file claims on behalf of tort claimants. Bankruptcy judges could appoint claims examiners in cases where large numbers of claims are brought into the proceedings to review how claims were generated and to advise judges on their findings, prior to those claims being allowed. And those judges need to be looking more closely at how lawyers are shaping the proceedings, serving as a cop on the beat in these cases.

Without such a new approach, the corporate bankruptcy system will continue to deteriorate, at the expense of troubled companies, their creditors and plaintiffs alike.

Mr. Rivkin practices appellate and constitutional law in Washington. He served at the Justice Department and the White House Counsel’s Office in the Reagan and George H.W. Bush administrations. Mr. Friedman is managing member of Friedman Partners LLC. He was director of the Executive Office for U.S. Trustees, 2002-05, and a Chapter 7 bankruptcy trustee.