PHILIP MORRIS, INC.; R.J. REYNOLDS TOBACCO COMPANY; BROWN & WILLIAMSON TOBACCO CORPORATION; B.A.T. INDUSTRIES P.L.C.; LORILLARD TOBACCO COMPANY; LIGGETT GROUP, INC.; UNITED STATES TOBACCO COMPANY; HILL AND KNOWLTON, INC.; THE COUNCIL FOR TOBACCO RESEARCH - U.S.A. INC.; and THE TOBACCO INSTITUTE, INC.,

PLAINTIFF'S SUPPLEMENTAL MEMORANDUM IN OPPOSITION TO DEFENDANTS' MOTION TO DISQUALIFY COUNSEL

INTRODUCTION

During oral argument on the defendants' Motion to Disqualify the State's private counsel, the Court requested supplemental briefs on multiple issues, including (1) whether the State's past contingent fee contracts were authorized by explicit statutory authority other than Conn. Gen. Stat. §3-125, as claimed by the defendants; (2) whether the Attorney General's office has examples of cases in which it has used the proceeds of litigation to pay attorneys' fees without first depositing the proceeds into the general fund and without obtaining legislative authorization to make such expenditures; (3) why payment of a contingent fee in this case would not violate state statutes governing the appropriation of state funds; (4) whether state statutes concerning the compromise of claims support the defendants' contention that the Attorney General cannot enter into a contingent fee contract without a legislative appropriation; and (5) whether the legislative history of the antitrust revolving fund act, or federal antitrust law, supports the defendant's claim that Conn. Gen. Stat. §35-32a prohibits the contingent fee agreement at issue in this case. This brief addresses these and other issues on which this Court requested clarification.

As is set forth in the Plaintiff's Memorandum in Opposition to the Defendants' Motion to Disqualify Counsel (hereinafter "Plaintiff's Brief"), the Attorney General is the chief civil law enforcement officer for the State of Connecticut and is entrusted with broad statutory and common law powers to protect the public interest of the State and to enforce its laws. Among the specific powers of the Attorney General is the authority set forth in Conn. Gen. Stat. §3-125 to "procure such assistance as he may require." It is pursuant to this authority that the Attorney General has entered into the contingent fee contract with private counsel in the present case. The Attorney General has done so in order to augment the resources of his office and to fully protect the interests of the State and its citizens, just as many prior Attorneys General have done.

The defendants would have this Court hold not only that the tobacco companies, as non-parties to the agreement with no right, title or interest in its terms, have standing to challenge the specific fee provisions of the agreement as negotiated by the Attorney General and his counsel, [As noted in the Plaintiff's Brief, the defendants only have standing, at most, to claim that the agreement violates their due process rights.] but also that the Attorney General is without any authority to enter into such an agreement without first obtaining a legislative appropriation of the as yet non-existent proceeds of this litigation. Such a result would conflict with well-established law and wreak havoc with the State's budgetary process which operates on the fundamental principle that only funds that belong to the State can be appropriated by the legislature. As is set forth below, and in the plaintiff's main brief, the defendants' arguments are completely unfounded.

ARGUMENT

THE CONTINGENT FEE CONTRACTS SET FORTH IN EXHIBIT J OF PLAINTIFF'S BRIEF WERE EXECUTED PURSUANT TO THE ATTORNEY GENERAL'S STATUTORY AUTHORITY UNDER CONN. GEN. STAT. §3-125 AND WERE NOT EXPLICITLY AUTHORIZED BY OTHER STATUTES OR FUNDED BY LEGISLATIVE APPROPRIATIONS

The State of Connecticut's contingent fee contract with its private counsel in this case, as in numerous prior cases, was entered into pursuant to the Attorney General's statutory authority under Conn. Gen. Stat. §3-125 to "procure such assistance as he may require." Despite their lack of standing to challenge the Attorney General's decision to enter into this contract, the defendants claim that the contract is not only illegal, but unprecedented, because the Attorney General's past contingent fee contracts (1) have been "based on statutory authority [other than Conn. Gen. Stat. §3-125] allowing for a contingency fee agreement or for attorneys fees to be paid out of the proceeds;" or (2) contained language "expressly representing that appropriations were available to pay the fees." See Defendants' Reply Brief, p.7. As a review of the contracts and

statutes in question makes clear, the defendants' claim is simply not true. With one limited exception, none of the statutes cited by the defendants even mentions contingent fees, much less authorizes them.

The Antitrust Contracts (contracts #1-5)

The first five contracts included in Exhibit J to the Plaintiff's Brief are examples of contingent fee agreements that the Attorney General's Office entered into in the 1970's with private counsel to obtain assistance with antitrust litigation. The defendants allege that these contracts were authorized by a 1976 state antitrust act that established an antitrust revolving fund and provided that, "[t]he attorney general may expend from the anti-trust revolving fund...such funds as he determines necessary for the payment of costs, expenses and charges incurred in the preparation, institution and maintenance of anti-trust actions under the state and federal anti-trust acts." 1976 Conn. Pub. Acts No. 76-327, codified at Conn. Gen. Stat. §35-32a, and later repealed by 1985 Conn. Pub. Acts No. 85-410. [A copy of the revolving fund act, 1976 Conn. Pub. Acts No. 76-327, as enacted in 1976 and until amended in 1980 by 1980 Conn. Pub. Acts No. 80-111, is attached hereto as Plaintiff's Supp. Exhibit 33. See also Section VII, infra , for a detailed analysis of the history and significance of this act.] Contrary to the defendants' claim, it is obvious from the dates of the contracts and the language of the revolving fund act that there was no relationship between the contracts and the legislation.

First, of the five antitrust contracts at issue, three were entered into before October 1, 1976, when the revolving fund legislation took effect. See Plaintiff's Exhibit J, contract #2, dated May 13, 1974; contract #3, dated September 15, 1976; and contract #4, dated June 8, 1976. [The Exhibits in the Appendix to the Plaintiff's Memorandum in Opposition are referred to herein as "Plaintiff's Exhibit ___." The Exhibits in the Appendix to this Supplemental Memorandum are referred to as "Plaintiff's Supp. Exhibit___." The Plaintiff's Exhibits are labeled alphabetically, the Plaintiff's Supp. Exhibits are labeled numerically.] Indeed, one of the contracts was entered into more than two years before the effective date of the act. Another antitrust contract, attached hereto as Plaintiff's Supp. Exhibit 37, predates the revolving fund act by more than eight years. Because nothing in the act indicated an intent that it was to apply retroactively, the contracts entered into prior to the October 1, 1976 effective date could not have been authorized by the act. See McNally v. Zoning Commission, 225 Conn. 1, 9 (1993)(new enactments should be construed to apply prospectively); Conn. Gen. Stat. §55-3.

As to those contracts entered into after October 1, 1976, the act was equally inapplicable. First and foremost, the act said absolutely nothing about contingent fee contracts. In addition, it explicitly stated that the revolving fund would "be comprised of ten per cent of the funds collected each year...the total amount of such fund not to exceed the sum of two hundred fifty thousand dollars." 1976 Conn. Pub. Acts No. 76-327, §1. The contingent fee agreements, however, provided for contingent fees of 25% of the net amount received by the State. Clearly, a 25% payment from the revolving fund would have been impossible if only 10% were deposited.

Furthermore, nothing in the revolving fund act required that private attorneys' fees be paid out of the revolving fund or otherwise stated that the fund was to be the exclusive method of paying the costs, expenses and charges incurred in the litigation of antitrust actions. Indeed, the legislative history of the act makes clear that former Attorney General Joseph Lieberman in fact used the revolving fund to pay for four attorney positions within the Attorney General's office. See Testimony of Joseph Lieberman, April 12, 1985, attached hereto as Plaintiff's Supp. Exhibit 39. [In testimony before the Judiciary Committee, Attorney General Joseph Lieberman stated that "[s]ince the 1970's, the Antitrust Division of the Attorney General's office has used a revolving fund which has funded four attorney positions through the collection of fines from the prosecution of antitrust penalties." He went on to note that his support for abolition of the fund was "contingent upon the Appropriations Committee's approval of the general fund appropriation for the four attorneys." See Plaintiff's Supp. Exhibit 39.] Thus the revolving fund was not in fact used to fund contingent fee contracts with private counsel.

Department of Transportation Contracts (contracts #7, 9-19)

The defendants' arguments regarding the authority for the twelve contingent fee contracts entered into with private counsel by the Attorney General's office during the 1980's on behalf of the Department of Transportation ("DOT") to handle collection matters (contracts # 7, 9-19) are equally unfounded. [Although most of these contracts were for assistance with collection matters and eviction proceedings, it should be noted that only the collection services were contracted for on a contingent fee basis. The eviction proceedings were paid for on an hourly basis.]

According to the defendants, the DOT contracts were authorized because (1) a statute authorizes the Commissioner of DOT to engage assistance on a "contract or other basis;" [The defendants apparently are relying on Conn. Gen. Stat. §13b-10, which states: The commissioner may, subject to the provisions of chapter 67, employ such agents, assistants and employees as he deems necessary to carry out his duties and responsibilities. He may retain and employ other consultants and assistants on a contract or other basis for rendering legal, financial, technical or other assistance and advice.] and (2) each contract expressly represented that DOT had appropriations to cover the expenses incurred in the contract. See Defendants' Reply Brief, p. 45. The statute on which the defendants rely, however, refers to the authority of the Commissioner, not the Attorney General, and thus is irrelevant to the contracts at issue because they were executed by the Attorney General, and not by the Commissioner. Moreover, even if applicable, Section 13b-10 merely authorizes the Commissioner to engage assistance on a "contract or other basis." It says nothing about whether such contracts may be on a contingent fee basis. [In essence, the defendants would have this court hold that the phrase "may retain and employ ...on a contract or other basis" in Section 13b-10 should be read very broadly to authorize contingent fees, while the phrase "may procure such assistance as he may require" in Section 3-125 should be read narrowly not to authorize such fees. The defendants cannot have it both ways.]

Furthermore, the defendants' statement that the contracts "expressly represented that DOT had appropriations to cover the expenses incurred in the contract" is not true. In fact, the contracts simply stated that "funds for this agreement are available from DOT," but said nothing about whether the funds were appropriated by the General Assembly. In the absence of any reference to appropriation, the funds could equally well have been available from moneys recovered pursuant to the litigation or from other sources other than by legislative appropriation.

Contract to Pursue a Second Injury Claim

In arguing that contract #6, a contingency fee contract to pursue a Second Injury Fund creditor's claim against a decedent's estate in North Carolina, was expressly authorized by Conn. Gen. Stat. §31-355, the defendants misquote [In 1987, seven years before the contract in question was executed, Conn. Gen. Stat. §31-355(d) was amended by 1987 Conn. Pub. Acts No. 87-277, and the language quoted and underlined by the defendants was repealed and replaced by the following: Any recovery made under this section, including any recovery for costs or attorney's fees, shall be paid into the fund. Any administrative or other costs or expenses incurred by the attorney general in connection with carrying out the purposes of this section, including the hiring of necessary employees, shall be paid from the fund....] and mischaracterize the statute. Section 31-355 provides that expenses incurred by the Attorney General in carrying out the purposes of the statute shall be paid from the Second Injury Fund, but says absolutely nothing about payment on a contingent

fee basis. Thus the defendants' claim that contract #6 was "issued pursuant to [a] statute expressly authorizing the fee arrangement," see Defendants' Reply Brief p. 46, is incorrect.

Contract To Recover Escheated Property

Contract #8 was a 1984 contingent fee contract in which the Attorney General and the State Treasurer contracted with private counsel for the collection of unclaimed property that had escheated to the State. Although the defendants claim that this contract was explicitly authorized by Conn. Gen. Stat. §3-74a, [Conn. Gen. Stat. §3-74a(f) states: The treasurer may request that the attorney general of another state or any person in another state bring an action in the name of the treasurer in such other state. This state shall pay all expenses including attorney's fees in any action under this subsection. Payment of such attorney's fees may be based in whole or in part on a percentage of the value of any property recovered in the action. Expenses paid pursuant to this subsection shall not be deducted from the amount that is subject to the claim by the owner under this part.] in fact Section 3-74 is a grant of authority to the State Treasurer, not the Attorney General, to enter into contingent fee contracts. To the extent that the Attorney General was contracting for the services set forth in these contracts, his authority was the language of Conn. Gen. Stat. §3-125 relied upon in the present case.

Contract To Perform Legal Services Relating To Florida Estate Proceedings (contract #20)

The last of the contracts submitted, Contract # 20, was a 1992 contingent fee agreement in which Florida attorney Robert Mandel agreed to represent the State, as a beneficiary to a will, in estate proceedings in the Florida courts. See Plaintiff's Exhibit J, contract #20. Although the defendants claim that the agreement to pay Mr. Mandel a percentage of the State's share of the estate was specifically authorized by Conn. Gen. Stat. §52-251, [Conn. Gen. Stat. §52-251 states: In any action brought to a court of equitable jurisdiction for the construction of a will or for the advice of the court as to the administration of an estate or trust under a will or trust instrument, by any person acting in a fiduciary capacity thereunder, there shall be allowed to each of the parties to the proceeding such reasonable sum for expenses and counsel fees as the court, in its discretion, deems equitable. The allowance shall be taxed as costs in the action, to be paid out of the estate.] nothing in the language of Section 52-251, like virtually all of the other statutes cited by the defendants, says anything about contingent fees. [Moreover, the Connecticut Supreme Court has interpreted Section 52-251 not to apply to probate proceedings and appeals from probate. First New Haven National Bank v. First New Haven National Bank , 153 Conn. 490 (1966). Because the case handled by Mr. Mandel was a probate proceeding and an appeal, it was beyond the scope of the statute. See Plaintiff's Supp.Exhibit 2.] Accordingly, the defendants' reliance on this statute is wholly misplaced.

PURSUANT TO A WELL ESTABLISHED PRACTICE APPROVED BY THE STATE AUDITORS, THE ATTORNEY GENERAL HAS ON MANY OCCASIONS PAID OUTSIDE COUNSEL FROM THE PROCEEDS OF SETTLEMENT OR JUDGMENT WITHOUT A LEGISLATIVE APPROPRIATION

The primary basis for the defendants' argument that the plaintiff's counsel should be disqualified is the erroneous assumption that any and all funds that may be recovered in this action must be deposited into the general fund and paid out only pursuant to a legislative appropriation. During oral argument on this issue, the Court asked the Attorney General to produce examples in which funds recovered by the Attorney General have been used to pay litigation expenses without first depositing them into the general fund and seeking a legislative appropriation. As the following examples demonstrate, funds recovered by the Attorney General's office from settlements and judgments are often deposited into funds that are entirely separate from the general fund from which expenses, including attorneys' fees, are paid without a legislative appropriation.

See Affidavit of Kevin Costello, Plaintiff's Supp. Exhibit 3, and related documents set forth in Plaintiff's Supp. Exhibits 4-30 and discussed below.

The James Flug Contracts

One example where the Attorney General's office has contracted to pay, and has paid, outside counsel with litigation settlement proceeds without a legislative appropriation is its contracts with Attorney James Flug, currently of Ingersoll and Bloch in Washington, D.C. For many years, the Attorney General's office has entered into annual contracts with Mr. Flug to provide legal services for the State of Connecticut in connection with the refund of petroleum overcharges pursuant to a 1986 settlement agreement in Department of Energy Stripper Well Exemption Litigation, M.D.L. No. 378 (D. Kan.) and related judicial and U.S. Department of Energy administrative actions. See Plaintiff's Supp. Exhibit 4. Under these contracts, the Attorney General's office has paid and continues to pay Mr. Flug $24,000 a year for his services, payable either out of the proceeds of the petroleum overcharge litigation or from funds available from the Office of Policy and Management. See Plaintiff's Supp. Exhibit 4. As in the present case, the Attorney General has entered into these contracts pursuant to his authority to procure assistance under Conn. Gen. Stat. §3-125.

In 1995 and 1996, the Attorney General chose to pay Mr. Flug out of the proceeds of the petroleum overcharge litigation. See Plaintiff's Supp. Exhibit 5. In each case, the proceeds were transferred by wire to the Treasurer's Office, where they were deposited either into the Attorney General's pending receipts account or its so-called "350 account."

The Attorney General's pending receipts account is part of the State's pending receipts fund. As is apparent from the most recent Auditors' Report on the Office of the Attorney General, the pending receipts fund is totally distinct from the general fund. See Auditors' Report on the Office of the Attorney General for Fiscal Years ended June 30, 1994 and 1995 (Plaintiff's Supp. Exhibit 6) at 2 and 5. It is used primarily for holding and distributing settlements that are not required to be held in interest-bearing accounts, and for other types of receipts, including fees, which have been received and are awaiting distribution. See State of Connecticut, Accounting Manual, Office of the Comptroller (Plaintiff's Supp. Exhibit 8), at §§6.0 - 6.9 (September, 1996) .

The Attorney General's "350 account" is a non-appropriated account [A "non-appropriated" account is an account to which the legislature does not appropriate any money. See Plaintiff's Supp.Exhibit 3, Affidavit of Kevin Costello.] within the general fund that was requested by the Attorney General's office and established by the State Comptroller's office in 1991. The function of the account is similar to the pending receipts account in that it is used for holding money that the Attorney General's office has received through judgments

and settlements. However, unlike the pending receipts account, the 350 account is typically used to pay expenses, such as expert witness and outside counsel fees, whereas the pending receipts account is used primarily to make restitution to consumers. See Plaintiff's Supp. Exhibits 9 and 3 ¶8.

In 1995, the petroleum overcharge cases generated a $313,816.23 distribution for the State that was transferred by wire to the Treasurer's office, and deposited into the Attorney General's pending receipts account. See Plaintiff's Supp. Exhibits 10 and 3¶9. Within a week of its deposit into the pending receipts account, the entire distribution was transferred to the Attorney General's 350 account. See Plaintiff's Supp. Exhibits 11 and 3¶10. [The designation "350" in box twenty, labeled "cost center," on Plaintiff's Supp. Exhibit 11 indicates that the money was to go to the 350 account. See Plaintiff's Supp. Exhibit 3¶10.] From the 350 account, $274,816.23 was transferred to the Office of Policy and Management for use in accordance with the terms of the settlement agreement governing the distribution. See Plaintiff's Supp. Exhibits 12 and 3¶11. The remaining $39,000 was left in the 350 account, from which $24,000 was used to pay Mr. Flug. See Plaintiff's Supp. Exhibits 13 and 3¶12. No legislative appropriation was made for any of these transfers or payments. See Plaintiff's Supp. Exhibits 3¶13.

In 1996, the process was similar, although the 1996 distribution of $261,531.89 was deposited by wire directly to the Attorney General's 350 account, rather than going first to the pending receipts account. See Plaintiff's Supp. Exhibits 14 and 3¶14. [As in Plaintiff's Supp. Exhibit 11, supra , the designation "350" in the box labeled cost center on Plaintiff's Supp. Exhibit 14 indicates that the money is being deposited to the 350 account. See Plaintiff's Supp. Exhibit 3¶10. ] From the 350 account, $252,531.89 was transferred to the Office of Policy and Management. See Plaintiff's Supp. Exhibits 15 and 3¶15. The remaining $9,000, when added to the $15,000 left over in the 350 account from the prior distribution, was used to pay Mr. Flug's $24,000 fee. See Plaintiff's Supp. Exhibits 16 and 3¶16. Once again, no legislative appropriations were made for any of these transactions. See Plaintiff's Supp. Exhibits 3¶17.

Significantly, this procedure for paying Mr. Flug has not gone unscrutinized. On the contrary, it has been carefully examined and accepted by the State auditors of public accounts. [The auditors of public accounts, also known as the state auditors, are required to audit the books and accounts of the Attorney General's office every two years. Conn. Gen. Stat. §2-90 (c). Any irregularity must be reported: If the auditors of public accounts discover, or if it should come to their knowledge, that any unauthorized, illegal, irregular or unsafe handling or expenditure of state funds or any breakdown in the safekeeping of any resources of the state has occurred or is contemplated, they shall forthwith present the facts to the governor, the state comptroller, the clerk of each house of the general assembly, the Legislative Program Review and Investigations Committee and the attorney general. Conn. Gen. Stat. §2-90(e).] For several years beginning in 1989, the Attorney General's office used a different procedure for compensating Mr. Flug whereby the bank that was distributing the settlement proceeds to the State paid Mr. Flug directly. See Plaintiff's Supp. Exhibits 17 and 3¶18. The State Auditors suggested changes to the procedure, not because they found anything illegal or improper in paying attorneys' fees out of the proceeds of the State's recovery and without a legislative appropriation, but rather because there was no "paper trail" to document the payment to Mr. Flug from the State's proceeds. According to the Auditors, the procedure "circumvent[ed] centralized State control over expenditures." See Audit Report on the Office of the Attorney General, Fiscal Years Ended June 30, 1992 and 1993, (Plaintiff's Supp. Exhibit 7) pp.10-11, 15; Plaintiff's Supp. Exhibit 3¶19. In

their 1994 report, they recommended that the agency's expenditure processing procedures be revised. Id.

As a result of the Auditors' recommendations, the Attorney General's office changed its procedure to the current process whereby the distribution is deposited in full to a non-appropriated Attorney General's account from which a check is issued to Mr. Flug. Plaintiff's Supp. Exhibit 3¶20. Following this change, the auditors conducted another audit in which they noted the status of their prior audit recommendations, including their recommendations concerning the Attorney General's expenditure processing procedures, and concluded that their recommendations had been implemented. See Plaintiff's Supp. Exhibits 6, p. 11, and 3¶21. Thus, the payment of legal fees from the proceeds of litigation deposited to the Attorney General's 350 account, and withdrawn without a legislative appropriation, is not only an established procedure within the Attorney General's office, but also one that has been critically examined and accepted by the State's Auditors.

Contingent Fee Example

Although Mr. Flug was paid a flat fee, the same procedure is used for paying contingent fees. For example, Attorney Robert Mandel, the outside counsel with whom the Attorney General contracted in 1992 pursuant to Contract #20 to represent the State in a Florida probate proceeding, negotiated a settlement whereby the State received $198,518.65 from an estate. Plaintiff's Supp. Exhibit 3¶22. The Treasurer's Office processed the payment, depositing $143,552.15 in the pending receipts account for later distribution to other accounts and $54,966.50 in the Attorney General's "350" account to pay Mr. Mandel's contingent fee. See Plaintiff's Supp. Exhibits 18 and 3¶22. Mr. Mandel's fee was subsequently paid from the 350 account without a legislative appropriation. See Plaintiff's Supp. Exhibit 3¶23.

The Arthur Andersen Settlement Distribution

The same procedure is also used in consumer restitution cases. For example, in 1993, the accounting firm of Arthur Andersen & Co. entered into a settlement agreement with the Attorney General at the conclusion of the Attorney General's investigation of accounting services rendered by Arthur Andersen to Colonial Realty Company. Pursuant to this agreement, the Attorney General's office distributed millions of dollars in restitution to investors who had lost money in Colonial Realty investments.

To begin with, on August 10, 1993, Arthur Andersen transferred by wire approximately $3.5 million to the Attorney General's settlement fund. See Plaintiff's Supp. Exhibits 19 and 3¶24. The settlement fund, which is managed by the State Treasurer, is separate from the general fund and is used to hold settlements that are required to be held in interest bearing

accounts until distribution. See Plaintiff's Supp. Exhibits 6, p.5, and 3¶25. Moneys held in the settlement fund are invested in the Treasurer's Short Term Investment Fund ("STIF") established by Conn. Gen. Stat. §3-27a. Id.

Of the $3.5 million deposited in the settlement fund and invested in STIF, $750,000 was transferred to the general fund, see Plaintiff's Supp. Exhibits 20 and 3¶26, and approximately $2.5 million was transferred to Shawmut Bank which had been hired by the Attorney General to process distribution checks to investors. See Plaintiff's Supp. Exhibits 21 and 3¶26. The remaining $250,000 was used to pay administrative costs, including consultants and attorneys fees, by transferring it as needed to the Attorney General's 350 account. See Plaintiff's Supp. Exhibit 3¶27. Among the transactions were two transfers of $23,155.64 and $24,442 respectively to pay Updike, Kelly and Spellacy for legal services, see Plaintiff's Supp. Exhibits 22 and 3¶27, two transfers of $100,000 and $22,500 respectively to pay Shawmut Bank for professional services, see Plaintiff's Supp. Exhibits 23 and 3¶28, and one transfer of $593.30 to cover the cost of publishing two legal notices. See Plaintiff's Supp. Exhibits 24 and 3¶29. As in the prior examples, there were no legislative appropriations for these payments of administrative and professional expenses, or for the payment of restitution to investors. See Plaintiff's Supp. Exhibit 3¶30.

Other Restitution Cases

In the Arthur Andersen case, the restitution to investors was administered and distributed by Shawmut Bank which had been hired by the Attorney General for that purpose. In the more typical case, however, the Attorney General's office handles the distribution itself. In such cases, such as the 1994 School Milk Antitrust Settlement, [The School Milk Antitrust settlement was a settlement of antitrust claims involving bid-rigging in the purchase of milk for school milk programs.] payments received pursuant to the settlement agreement are deposited into an interest-bearing STIF account. See Plaintiff's Supp. Exhibits 25 and 3¶31. From there, the funds are transferred to the Attorney General's pending receipts account from which restitution is made to consumers, wholly outside of the general fund and without any appropriation by the legislature. See Plaintiff's Supp. Exhibits 26, 28 and 3¶33. [In the School Milk Settlement case, some of the proceeds were also used to pay expenses. In particular, $50,000 was transferred from the pending receipts account to a Department of Administrative Services revolving fund and $11,304 was transferred to the general fund as a recovery of attorneys' fees pursuant to Conn. Gen. Stat. §35-32a. See Plaintiff's Supp. Exhibits 26, 27 and 3¶32. Unlike the present case, there were no outside counsel involved in the school milk settlement, and thus the award of attorneys' fees was a recovery by the State that properly belonged in the general fund pursuant to the language of the statute. ]

Refunds to Appropriated Accounts

All of the examples cited above involved money that was received by the Attorney General's office from settlements or judgments and then processed either entirely outside of the general fund or through general fund accounts that are non-appropriated. Even when expenses are paid out of appropriated accounts, however, the account may be reimbursed with settlement or judgment proceeds. See Conn. Gen. Stat. §4-86(a). [Conn. Gen. Stat. §4-86(a) does not explicitly authorize this practice, but recognizes that it occurs. It states: "The office of policy and management shall be notified monthly of all refunds of current year expenditures applied to budgeted appropriation accounts for expenditures." Conn. Gen. Stat. §4-86(a).]

For example, in the School Milk Antitrust Settlement discussed above, $50,000 of the $611,367.10 in proceeds was transferred from the Attorney General's pending receipts account to a Department of Administrative Services revolving fund in order to reimburse the fund for fees charged by an econometric expert used in the antitrust investigation. See Plaintiff's Supp. Exhibits 27 and 3¶32. Similarly, in 1990, in connection with another antitrust case, the Attorney General's office received $1,440.60 from Wyatt, Inc. to reimburse the State for consulting services rendered by Ben Johnson Associates, an outside consulting firm. The Attorney General's office deposited the money into its appropriated general fund account, known as its "002" account, in order to cover the expense. See Plaintiff's Supp. Exhibits 29 and 3¶34. A similar procedure was followed in 1995 in State of Connecticut v. Tobacco Valley Sanitation Service Co., in which the Attorney General's office deposited settlement proceeds into a STIF account, and then transferred $346.60 to its "002" account in order to pay a bill for deposition reporting services connected with the case. See Plaintiff's Supp. Exhibits 30 and 3¶35.

All of these examples are significant in that they demonstrate, contrary to the defendants' claims, that the Attorney General's payment of outside counsel from the proceeds of judgments or settlements, without a legislative appropriation, is by no means unprecedented. On the contrary, it has been done many times before, pursuant to a well-established procedure that has been scrutinized and approved by the State Auditors. Moreover, as set forth below, this procedure is entirely consistent with state statutory requirements.

THE ATTORNEY GENERAL'S PRACTICE OF PAYING OUTSIDE COUNSEL FROM SETTLEMENT AND JUDGMENT PROCEEDS WITHOUT LEGISLATIVE APPROPRIATION DOES NOT VIOLATE STATE STATUTES GOVERNING THE EXPENDITURE OF PUBLIC FUNDS

The defendants' argument that the Attorney General must pay private counsel out of appropriated funds is based on the assumption that article fourth, §22 of the state constitution, and Section 3-17 the Connecticut General Statutes, which state that "[t]he Treasurer shall receive all moneys belonging to the state," and Conn. Gen. Stat. §4-32, which states that each agency "receiving any money for the state" shall pay the same to the Treasurer, mean that "[a]ny funds recovered in this case must be paid into the general fund." Defendants' Brief pp. 5-6. This assertion conflicts with the State's statutory scheme governing the State budget.

The fact that state money must be received by the Treasurer does not require the Treasurer to deposit it into the general fund. Indeed, none of these provisions even mention the general fund. [The only statute cited by the defendants that expressly references the general fund is Conn. Gen. Stat. §35-32a. An analysis as to why this statute is inapplicable to the present case is set forth in Section VII, infra .] As explained above, the general fund is only one of numerous funds that are administered by the Treasurer, many of which are entirely separate from the general fund. [Among the funds held and/or invested by the Treasurer, which are entirely separate from the general fund, are the Pending Receipts Fund, the Short Term Investment Fund, Connecticut Municipal Employees' Retirement Funds, the State's Attorney Retirement Fund, Teachers' Annuity Fund, Teachers' Pension Fund, Teacher Survivorship and Dependency Fund, School Fund, State Employees' Retirement Fund, the Hospital Insurance Fund, and the Second Injury Fund. See Conn. Gen. Stat. §3-13c; Conn. Gen. Stat. §31-354. ] Depending on the particular nature and purpose of the state funds that the Treasurer receives, he may or may not deposit them into the general fund.

Moreover, even if these provisions were construed to require the Treasurer to deposit all money belonging to the state into the general fund, they would only apply, by their express terms, to money that "belongs to the State." As the legislature has clearly recognized in Conn. Gen. Stat. §4-33(a), not all money coming into the hands of public officials "belongs to the State." Section 4-33(a) provides, in pertinent part, that:

Any public official of the state, with the approval of the treasurer and the comptroller, is authorized to deposit any funds or moneys in such official's hands belonging to the state or held by such official as a trustee or in an official capacity, in any qualified public depository...or any bank authorized pursuant to section 3-24, provided such deposit shall only be made in such official's name as such official or trustee or in the name of the state.

(emphasis added). In referring to money (1) belonging to the state; or (2) held by an official as a trustee; or (3) held by an official in an official capacity, the legislature clearly recognized that some of the money that comes into the hands of public officials does not belong to the State, but rather is held in trust or on behalf of individuals or entities other than the State.

It is black letter law that "[t]o be subject to the appropriation power of the legislature, funds held by state officers or agencies must belong to the state." 63A Am. Jur. 2d Public Funds, §37. Thus, to the extent that the state officers or agencies hold funds that do not belong to the state, they can not be appropriated. This fundamental principle is the basis for numerous cases that hold that the legislature cannot appropriate funds held in trust or in a similar custodial capacity. See, e.g., Opinion of Justices to Senate, 378 N.E.2d 433, 436 (Mass. 1978)("[f]unds held in trust to be disbursed according to legislatively prescribed conditions are not subject to appropriation...even though they are received 'on account of the commonwealth,' and the State Treasurer is designated custodian of the fund"); MacManus v. Love, 499 P.2d 609, 610 (Colo.1972)("[t]he power of the General Assembly to make appropriations relates to state funds. Custodial funds are not state funds"); State ex. rel Hawkins v. Oklahoma Tax Commission, 462 P.2d 536, 539 (Okla. 1969) (constitutional provision that "no money shall be drawn from the treasury but in pursuance of specific appropriations

made by law" has no application to special or trust funds that have never been placed in the general fund); Board of Regents of University of Nebraska v. Exon, 256 N.W.2d 330, 334 (Neb. 1977) (funds derived from the operation of a state university or received by the university from the federal government or private donors are not subject to appropriation because "they are trust funds, or have a similar status, and are not available to the Legislature for general governmental purposes"). Similarly, the Kansas Supreme Court has held that a tax paid under protest may be refunded without an appropriation because "it is not public money...An act of the Legislature appropriating this particular sum would be void." Kittredge v. Boyd, 18 P.2d 563, 565 (Kan.1933).

Most significantly, other courts have applied the same reasoning to uphold the payment of contingent attorneys' fees without an appropriation, despite a constitutional or statutory provision requiring an appropriation in order to expend funds from the state treasury. See, e.g. Button's Estate v. Anderson, 28 A.2d 404 (Vt. 1942); Board of Commissioners of Washington County v. Clapp, 86 N.W. 775 (Minn.1901); State v. West, 21 N.E. 2d 987 (Ohio 1939); Cherokee County v. Odom, 15 S.W.2d 538 (Tex.1929); Botts v. Arkansas County, 57 S.W.2d 563 (Ark. 1933). As the Vermont Supreme Court observed in Button's Estate v. Anderson, 28 A.2d 404 (Vt.1942), if taken literally, the constitutional provision that "no money shall be drawn out of the Treasury, unless first appropriated by act of legislation," would not only prohibit the payment of a contingent fee owed to two attorneys who had recovered over $90,000 for the state, but also would lead to absurd results, such as the need for an appropriation to refund even inconsequential sums that found their way into the state treasury, but to which all parties agreed the state had no legal or equitable right. Concluding that "[s]urely the framers of the Constitution could not have intended any such consequences," the court upheld the payment, without an appropriation, on the grounds that:

Although the legal title to the whole fund no doubt is in the State, the petitioners have equitable rights to that portion of the same which represents their fee. This part in all equity and good conscience belongs to them...This portion of the fund never legally and equitably belonged to the State as part of its public funds for, at the latest, when received, the lien attached to it and remains upon it so that it is held by the State subject to the same.

Id. 28 A.2d at 410. The same analysis applies to the present case. [The defendants' suggestion that private counsel in this case would not be entitled to an equitable lien because they would have a contractual remedy, see Defendants' Reply Brief, p.14-15, is completely unfounded. Connecticut courts not only recognize equitable liens, see Perlmutter v. Johnson , 6 Conn. App. 292, 298 (1986), cert . denied , 479 U.S. 1035 (1987), but have expressly done so in contingent fee cases. See Webber, Inc. v. Chapman , 1994 CaseBase 9073, CV 290715 (September 7, 1994), attached hereto as Plaintiff's Supp. Exhibit 31. Indeed, as the Webber court noted, "[u]nderlying any charging lien must be an express or implied contract for fees entered into by the attorney and client." Id . at 9077 (emphasis added).]

Because the Connecticut General Assembly has explicitly recognized that not all funds that come into the hands of state officials belong to the State, see Conn. Gen. Stat. §4-33(a), it could not have intended Section 4-96 [Gen. Stat. §4-86 states, in pertinent part: (b) Each warrant, draft or order upon the state treasurer shall specify the particular appropriations against which it is drawn, and no money shall be paid by the treasurer unless the warrant, draft or order contains such a specification.... (c) The comptroller shall keep an account in connection with each appropriation and shall not issue any warrant, draft or order on the treasurer in payment of any obligation in excess of the available balance of the appropriation for the purpose or purposes for which such obligation was incurred...] to mean that the Treasurer can pay out no money except by appropriation. [Indeed, the Comptroller has recognized that "Trust and Agency funds have no 'appropriations,'" and thus, presumably to comply with the apparent intent of Section 4-86 that expenditures be accounted for and covered by adequate funds, has provided that the identification code "999" "should be used for coding all expenditure documents charging these funds." See Accounting Manual, (Plaintiff's Supp. Exhibit 8) p. 3-4. ] The only rational construction of this statute that comports with the fact that the State cannot legally appropriate funds that are not state funds is that it only pertains to the funds that belong to the State. To conclude otherwise would make it impossible for the Treasurer to administer trust and agency accounts.

The same analysis applies to Conn. Gen. Stat. §§4-98 [ Conn. Gen. Stat. §4-98 states, in pertinent part: [N]o budgeted agency nor any agent thereof shall incur any obligation, by order, contract or otherwise, except by the issue of a purchase order and commitment transmitted by the budgeted agency or its agents to the commissioner and the comptroller...Upon the receipt of any such purchase order and commitment, the comptroller shall immediately charge the same to the specific appropriation of the budgeted agency issuing the same and certify on the face of the purchase order that the purchase is approved and recorded, if the proposed commitment is within the applicable specific appropriation and the budgeted agency has unencumbered funds sufficient to defray such expenditure.] and 4-100. [Conn. Gen. Stat. §4-100 states, in pertinent part: Whenever any specific appropriation of money has been made by the general assembly...each agent, commissioner or executive officer of the state...who wilfully authorizes or contracts for the expenditure of any money or the creation of any debt for any purpose in excess of the amount specifically appropriated for such purpose...shall be fined not more than one thousand dollars or imprisoned in a community correctional center not more than one year or both.] These statutes by their terms refer to funds that have been specifically appropriated. They could not have been intended to prevent the Attorney General or other state officers from expending funds that are not in the State budget and would not even exist were it not for the efforts of the Attorney General and the private counsel hired to assist him. See 1993 Conn. Op. Atty. Gen. (1/13/93)(Plaintiff's Exhibit H); Gonzales v. Personal Collection Service, 494 P.2d 201, 205 (Wyo. 1972)(upholding a contingent fee contract without a legislative appropriation, noting that "a possible fund cannot be treated in the same manner as a fund the existence of which is known"). Indeed, the Connecticut Supreme Court held long ago that these statutes should not be rigidly construed to prohibit the expenditure of unappropriated funds. See Whitney v. City of New Haven, 58 Conn. 450, 20 A. 666 (1890); State v. Staub, 61 Conn 553, 23 A. 924 (1892). In Whitney, the court concluded that Section 378 of the General Statutes (now Section 4-100) did not prohibit a community from expending money on a project for which it had made no appropriation:

This statute it will be noticed carefully limits its application to cases where specific appropriations have been made for a particular purpose. It is not pertinent to the circumstances under consideration. Here no appropriation was made. There was therefore none to exceed.

Whitney v. City of New Haven, 58 Conn. 450, 462 (1890). Similarly, in State v. Staub, 61 Conn 553 (1892), the Supreme Court was faced with determining whether a statute similar to 4-98 and 4-100, that has since been repealed, prohibited the Comptroller from distributing statutorily mandated education money to towns within the State because the legislature had refused to appropriate any money for that purpose. The statute provided, in part, that "[n]o department of the state government, no officer of the same, and no officer of any public institution, shall expend in any fiscal year or years any sum in excess of appropriations made by the General Assembly for such year or years, or involve the state in any contract for the future

payment of moneys in excess of any such appropriation." Id. at 562. Concluding that "[t]he act on its face is not applicable to a condition of affairs where no special appropriations whatever are or can be made," and that the act could not have been intended to prevent the carrying on of state government in the absence of appropriations, the court held that education money should be expended as statutorily required, despite the lack of a specific appropriation. Id. at 563.

The same construction applies in the present case and compels the conclusion that the legislature could not have intended Sections 4-98 and 4-100 to prohibit the Attorney General from entering into any contract to pay attorneys' fees without a legislative appropriation, only those that would involve the expenditure of funds that belong to the State.

THE DEFENDANTS' APPROPRIATIONS CLAIM CONFLICTS WITH THE ATTORNEY GENERAL'S LONG-STANDING AUTHORITY TO SETTLE STATE CLAIMS WITHOUT AN APPROPRIATION.

The defendants' appropriation claim defies common sense as recognized by the Maryland court in its decision denying the tobacco industry's motion to dismiss contingency fee counsel in Maryland. Philip Morris v. Glendening, Plaintiff's Exhibit C at 26-27. If the Attorney General could not agree to allow private counsel to retain--through the payment of a contingent fee--a portion of any monetary judgment obtained against the defendants without first securing an appropriation from the legislature, then logic dictates that the Attorney General could never settle a lawsuit for less than the full relief to which the State may be entitled because the settlement would allow a defendant to retain a sum of money (without an appropriation) that otherwise belongs to the State.

Thus, the tobacco defendants must necessarily be arguing that the Attorney General must obtain legislative approval (or perhaps approval from the governor) before he settles any lawsuit for less money than the State is justly due. To support this flawed claim, defendants point to two statutes that they claim evidence the Attorney General's lack of power to settle a lawsuit for less than that to which the state may otherwise be entitled in the absence of an appropriation.

Conn. Gen. Stat. § 3-125a(a) Does Not Prohibit The Attorney General From Entering Into A Contingent Fee Agreement.

First, the defendants rely on Conn. Gen. Stat. § 3-125a(a), which provides in relevant part:

Notwithstanding the provisions of subsection (g) of section 4-160, [Conn. Gen. Stat. § 4-160(g) recognizes that the Attorney General may compromise or settle, with consent of the court, any case in which the State has been sued following a grant of permission to sue by the State's claim commissioner. This provision applies only to claims against the State that were first brought at the Claims Commission and in which the Claims Commissioner has waived the State's sovereign immunity.] the attorney general shall not enter into any agreement or stipulation in connection with a lawsuit to which the state is a

party that contains any provision which requires an expenditure from the general fund budget in an amount in excess of two million five hundred thousand dollars over the term of agreement or stipulation, unless the general assembly, by resolution, accepts the term of such provision.

Plainly, this provision is inapplicable to cases in which the State is a plaintiff because, by its terms, the statute governs situations requiring the affirmative outlay of State money as part of the settlement--that is--as a defendant in the lawsuit. [The legislative history of this provision makes clear that the statute was passed in part in connection with a lawsuit brought against the State Department of Children and Families ("DCF"). 34 Conn. H.R. Proc., pt. 36, 1991 Special Session-June, p. 1326 (August 21, 1991)(remarks of Representative Richard D. Tulisano) attached hereto as Plaintiff's Supp. Exhibit 32. That case was settled through a consent decree in which the State, through the Attorney General, agreed to increase state expenditures by DCF in order to provide greater services to the public. Because that consent decree, and other similar settlements, required the State to expend state funds far beyond previously budgeted amounts, the legislature sought to circumscribe the Attorney General's power to so obligate the State without legislative input. Id . at 1323-27.] Thus, it cannot be read to circumscribe the State's ability to settle any lawsuit in which the State is the plaintiff because such a case would not require the State to obligate itself to a judgment necessitating the expenditure of state funds.

The legislative concern embodied in Section 3-125a was to assure that claims against the State are not settled in a manner that puts undue burden on the expenditure side of the state budget. As in the DCF case (see note 27), a large expenditure of money required by a consent decree or other judicial settlement without the existence of offsetting amounts on the revenue side of the budget could wreak fiscal havoc. But the settlement of claims brought by the State does not implicate such a concern. There is no impact on the expenditure side of the budget. Moreover, the revenues from claims such as the ones made in this action are not contemplated by the legislature in fashioning the budget. Thus, any compromise of the claims made herein do not in any way affect the revenue side of the budget, except that it may provide an unbudgeted revenue surplus in the year any moneys are paid in settlement.

In fact, the defendants' reliance on Section 3-125a(a) actually supports the State's position. By enacting Section 3-125a(a), the legislature has indicated its understanding that, as a general rule, the attorney general has the authority to "enter into any agreement or stipulation in connection with a lawsuit to which the State is a party. . . ." Id. Indeed, Representative Richard Tulisano stated in support of the bill: "The bill is a radical departure from past practices...." 34 Conn.H.R. Proc., pt. 36, 1991 Special Session-June, p. 1325 (August 21, 1991), attached as Plaintiff's Supp. Exhibit 32. In the absence of a statute like Section 3-125a(a), therefore, there is no limit on the Attorney General's historical and common law authority to obligate the State when settling any claim against the State. [The Connecticut Supreme Court has long recognized a historical common law basis for the position of Attorney General. Although the office itself was created by statute in 1897, earlier cases recognized the traditional role the Attorney General in England played in representing the interests of the King in legal matters, and the transfer of these common law powers and duties to the State's Attorney after the Revolution. See Statutes 1786, p.11. The State's Attorney's powers, although exercised primarily in the criminal law sphere, included the broad mandate to appear "in all matters proper for, and in behalf of the State." Id. These powers were held to include "the power and duty to exercise the common law powers appertaining to the Office of the Attorney General, so far as applicable to our system of jurisprudence," State v. Keena , 64 Conn. 212, 21 (1894), and could only be abrogated "by the clear terms of the statute." Id . at 216. In 1897, when the office of the attorney general was created to handle the State's civil legal matters, with the State's Attorneys continuing to handle the state's interests in criminal matters, all the civil common law powers of the State's Attorney were transferred to the Attorney General's office by virtue of the Act creating the office. Public Acts 1897, Chapter 191. See also Commission on Special Revenue v. Freedom of Information Commission , 174 Conn. 308 (1978).] If the rule were otherwise, Section 3-125a would be rendered superfluous. As a result, in cases in which the State is a plaintiff, there is no limitation on the Attorney General's ability to settle a case for less money than was first sought by the State. Since the Attorney General properly can agree that a defendant may retain some funds that might otherwise be payable to the State, the defendants' claim that Section 3-125a supports the conclusion that the Attorney General is powerless to agree

that private counsel hired by the State can retain a portion of a judgment otherwise payable to the State is without merit.

Conn. Gen. Stat. § 3-7 Does Not Prohibit The Attorney General From Entering Into A Contingent Fee Agreement.

Second, the tobacco defendants claim that Conn. Gen. Stat. § 3-7(c) [Conn. Gen. Stat. § 3-7(c) provides in relevant part: Upon recommendation of the attorney general, the governor may authorize the compromise of any disputed claim by or against the state or any department or agency thereof, and shall certify to the proper officer or department or agency the amount to be received or paid under such compromise.] evidences a lack of Attorney General power to settle a lawsuit, in the absence of an authorization by the Governor, for less than that to which the state may otherwise be entitled. This claim is also without merit.

The defendants' § 3-7(c) argument directly conflicts the Attorney General's long-standing statutory and common law authority [See , supra , note 28.] as chief legal officer of the state of Connecticut. Conn. Gen. Stat. § 3-125 explicitly grants to the Attorney General the authority of "general supervision of all [civil] legal matters in which the State is an interested party." The Connecticut Supreme Court has characterized the Attorney General as having the "unqualified role of chief legal officer of the State [and] he or she must be able to direct the legal affairs of the State and its agencies." Commission on Special Revenue v. Freedom of Information Commission, 174 Conn. 308, 320 (1978)(emphasis added). As the Court stated, the "Attorney General's responsibility is not limited to serving or representing the particular interests of State agencies, . . . but embraces serving or representing the broader interests of the State. . . ." Id. at 320. "The attorney general of the state is in a unique position. He is indeed sui generis." Id. at 318.

In accordance with this well-settled role, the procedure of Section 3-7(c) regarding the Governor's role in compromising a disputed claim is not required for claims in which the Attorney General has already initiated a lawsuit against the person disputing the claim. It is not surprising, therefore, particularly in light of the Attorney General's unqualified and unique role in our constitutional scheme, that the defendants fail to point to a single authority that requires, or even suggests, that the Attorney General must secure the Governor's approval under § 3-7(c) before settling each and every one of the thousands of lawsuits that the State brings each year against thousands of individual who dispute a claim of the State.

Thus, the Attorney General's statutory and common law authority to control and supervise the State's litigation permits him, without the approval of the legislature or governor, to settle lawsuits brought by the State for less relief than that to which the State may be justly due. Given that long-recognized and unchallenged authority, it would be anomalous to hold that he is prohibited from allowing, in the pursuit of the broad interests of the State, private counsel to retain a portion of any money

judgment obtained from the tobacco defendants.

BECAUSE THIS ACTION IS NOT AKIN TO A CRIMINAL PROSECUTION, DEFENDANTS' RELIANCE ON CLANCY v. SUPERIOR COURT IS MISPLACED

The defendants acknowledged at oral argument that their due process challenge to the State's contract with its private lawyers is not limited merely to the presence of the contingent fee provisions, but that it necessarily also challenges the ability of the State to employ private counsel on an hourly basis in any case predicated on the State's sovereign enforcement powers, because even those types of fee arrangements may have the potential of interfering with the "special prosecutor's" discretion. This argument, if accepted, would invalidate the use of special prosecutor agreements, which have been routinely upheld as constitutional. See, e.g., East v. Scott, 55 F.3d 996, 1000-01 (5th Cir. 1995)(private prosecutor must effectively control a prosecution to violate the accused's due process rights); see also Morrison v. Olson, 487 U.S. 654, 108 S.Ct. 2597 (1980)(upholding constitutionality of independent counsel statute).

The defendants attempt to liken the present case to the action in People ex rel. Clancy v. Superior Court, 39 Cal.3d 740, 705 P.2d 347, 353 n. 4, 218 Cal. Rptr. 24 (1985), cert. denied, 475 U.S. 1121 and 479 U.S. 848 (1986), the one civil case cited by them in which a contingent fee agreement was held to be violative of due process. [In Clancy , however, the California court held that there was a direct nexus between the civil public nuisance action brought by the prosecutor and related criminal laws such that the action was akin to a criminal prosecution.] In so doing, the defendants stress that the plaintiff in this action seeks civil penalties and injunctive relief and, therefore, the action should be considered sufficiently criminal in nature to invoke the concerns raised by the Clancy decision. This contention is flawed for several reasons.

First, despite defendants' unwillingness at oral argument to characterize the plaintiff's causes of action, the tobacco defendants have recently argued that the plaintiff's action is not akin to a criminal case but is instead a garden-variety money damages action. In their federal court preemptive lawsuit that some of the tobacco defendants filed against the Attorney General, the defendants argued that the complaint should not be dismissed under the doctrine of Younger abstention, because the "true focus of [the State's] suit is the pursuit of money damages." Plaintiff's Memorandum of Law In Opposition to Motion to Dismiss at p.11, Philip Morris v. Richard Blumenthal, U.S. District Court for the District of Connecticut, CV No. 396CV01221, attached hereto as Plaintiff's Supp. Exhibit 1. Accordingly, the tobacco defendants argued in that case, "[the State's] pursuit of money damages in a state civil lawsuit plainly does not qualify as a central sovereign function of state government akin to 'criminal prosecutions and collection of state taxes.'" Id. at 13.

Here, the tobacco defendants now assert that the action is so akin to a criminal prosecution that the lawyers assisting the State with the case--but concededly having no ultimate decision-making power with respect to the action--are akin to criminal prosecutors. The contradictory nature of their arguments strongly suggests the weakness of their position.

Second, merely because the State has brought a sovereign enforcement action that includes a request for civil penalties and injunctive relief in order to vindicate on-going harm caused by the defendants does not magically transform this action into one "akin to a criminal prosecution." In fact, the defendants have failed both in their brief and at oral argument to cite a single Connecticut case holding that any of the relief sought by the plaintiff in this case is criminal or quasi-criminal in nature. That is because the law of Connecticut is otherwise.

For example, the Connecticut Supreme Court has held that actions for civil penalties are essentially equitable and restitutionary in nature rather than penal and retributive. Commissioner of Environmental Protection v. Connecticut Bldg. Wrecking Co., 227 Conn. 175, 186 (1993)(holding that defendants were not entitled to a jury trial in a civil penalty action). Similarly, the legislature explicitly provides that the Connecticut Unfair Trade Practices Act is "remedial and be so construed." Conn. Gen. Stat. § 42-110b(d); see also Hinchliffe v. American Motors Corp., 184 Conn. 607, 617 (1981)(no need to prove actual damages in a CUTPA "private attorney general" suit in order to achieve equitable remedies). An action under CUTPA is an equitable action. Associated Investment Co. v. Williams Associates, 230 Conn. 148 (1994). Likewise, sovereign enforcement of the Connecticut Antitrust Act is not a criminal proceeding. State v. Tobacco Valley Sanitation Co., 818 F. Supp. 504, 507 (D. Conn. 1993) (sovereign enforcement action for damages, injunction and civil penalties after criminal acquitted does not implicate protections against double jeopardy).

The defendants claim also fails as it pertains to injunctive relief. Both CUTPA and the Connecticut Antitrust Act were enacted to encourage private individuals to bring so-called "private attorneys general" suits to supplement the State's ability to enforce the regulatory requirements of the statutes. Hinchliffe, 184 Conn. at 615 n.5; cf. Reiter v. Sonotone, 442 U.S. 330, 344 (1979) (" Congress created the treble-damages remedy of § 4 precisely for the purpose of encouraging private challenges to antitrust violations. These private suits provide a significant supplement to the limited resources available to the Department of Justice for enforcing the antitrust laws and deterring violations"). In such "private attorneys general actions," a private plaintiff is generally entitled to the same injunctive relief as is available in an action brought by the

State. See, e.g., California v. American Stores Co., 495 U.S. 271, 284, 110 S.Ct. 1853, 1860-61 (1990). The tobacco defendants, however, do not appear to contend, nor could they reasonably do so, that a "private attorney general" plaintiff could not enter into a contingent fee agreement with a lawyer in bringing such an action. Thus, it would be anomalous to hold that where the State, instead of a private party, seeks injunctive relief, that the State is hamstrung from procuring similar assistance from private counsel.

Courts in other jurisdictions have uniformly held that sovereign enforcement actions under unfair trade or antitrust laws seeking injunctions and civil penalties are civil in nature and do not provide defendants constitutional rights available in criminal prosecutions. E.g., State v. O'Neill Investigations, 609 P. 2d 520, 527-28 (Alaska 1980)(unfair trade act); People v. Superior Court of Los Angeles, 525 P. 2d 716, 724 (California 1974) (unfair trade act); State v. Goldberg; 608 S.W. 2d 385 (Missouri 1980)(unfair trade act); State v. Alpine Air Products, 500 N. W. 2d 788, 792-93 (Minnesota 1993)(unfair trade act); Kimmelman v. Henkels & McCoy , 527 A. 2d 1368 (New Jersey 1987) (antitrust act); State v. Graley's Body Shop, Inc., 425 S.E. 2d 177 (West Virginia 1992) (antitrust act); New York v. Hendrickson Bros., Inc., 840 F.2d 1065, 1086 (2d Cir.), cert. denied, 488 U.S.848 (1988)(antitrust act); Cf. Herald Co. v. Harper, 410 F.2d 125 (8th Cir. 1969) (antitrust treble damage provisions); United States v. J.B. Williams Co., 498 F. 2d 414, 421 (2d. Cir. 1974) (civil penalties under Federal Trade Commission Act).

As a result, the defendants' reliance on Clancy should be rejected.

CONN. GEN. STAT. § 35-32a CANNOT SERVE TO DISQUALIFY COUNSEL IN THIS CASE

Defendants seek disqualification of outside counsel on their claim that Conn. Gen. Stat. § 35-32a prohibits payment of counsel pursuant to the contract. Even if defendants had standing to raise the issue (which they do not), and further, even if defendants were right that the statute would not permit payment (which it does not), there is no basis for disqualification of counsel on this ground.

There are currently 70 counts in the complaint. Only one is an antitrust count. Of that one count, defendants' argument only relates to a portion of the possible moneys awarded. Defendants' principal claim is that an award of attorneys' fees must go into the general fund pursuant to Section 35-32(2). But a contingency fee is not an "award" of attorneys' fees.

A contingency fee is paid from the corpus of the damage award. Section 35-32a(4) only refers to a deposit into the general fund of damages "collected" for injuries to the state's

business or property, a claim pursuant to Conn. Gen. Stat. § 35-35. The clearly limiting use of the term "collected" itself contemplates the deposit of the net proceeds. In any event, on its face, section 35-32a has no impact on contingency fees from damages regarding injuries to persons residing in the state or to the state's general economy as provided for in Conn. Gen. Stat. § 35-32(c). A contingency fee paid from the corpus of a damage award for such injuries is not even arguably covered by section 35-32a. Thus, even as to possible fees to be gained pursuant to the antitrust claim, the defendants' arguments are extremely limited.

No challenge is made under Section 35-32a to the efficacy of the contract as it applies to 69 of the 70 counts of the complaint, which represent over 98% of the possible ways for the State to obtain judgment, from which the contingent fee would be paid to counsel. Thus, Section 35-32a provides no basis to disqualify counsel who are clearly entitled to payment under the other claims. Moreover, any assessment of the impact of 35-32a on the contract is not ripe. Until there are awards that could arguably be subject to the section's terms, there are insufficient facts under which to assess the issues and there is no necessity to decide the issues or to assess the practical effect of any decision.

Significantly, the contract itself takes this issue completely away from the defendants as a basis for disqualification. The contract contains a severability provision that would automatically void a provision deemed to be unlawful, while keeping the remaining portions of the contract intact. Section 16.4 of the contract provides:

If any provision of this agreement, or application to any party or circumstance, is held invalid by any court of competent jurisdiction, the balance of the provisions of this Agreement, or their application to any parties or circumstances, shall not be affected, but only if the balance of the provisions of this Agreement would then continue to conform to the requirements of applicable law.

Thus, Section 35-32a cannot by itself affect the efficacy of the contract and there can be no grounds for disqualification.

CONN. GEN. STAT. § 35-32a WAS NOT INTENDED TO ALTER THE PRACTICE OF USING CONTINGENCY FEE COUNSEL

It would be a perverse result if Conn. Gen. Stat. § 35-32a were to be read as a limitation on the ability of the Attorney General to enforce efficiently the Connecticut Antitrust Act. The Connecticut Antitrust Act is a remedial statute which is designed to encourage vigorous enforcement by both the Attorney General and private parties alike. The establishment and subsequent abolishment of the Antitrust Revolving fund were both done to enhance antitrust enforcement, not retard it. Additionally, it is clear that the Antitrust Revolving Fund was designed as a funding mechanism separate and apart from the use of contingent fee counsel, one having no affect on the other.

The Connecticut Antitrust Act Is A Remedial Statute Whose Terms Are Designed To Encourage Enforcement

The entire scheme of the Connecticut Antitrust Act demonstrates the strong objective of having vigorous enforcement by the Attorney General. The Attorney General is granted broad authority under the antitrust laws. He is granted standing in every manner imaginable:

The Attorney General is authorized to seek injunctions of all restraints of trade that violate the Act. Conn. Gen. Stat. § 35-32(a).

The Attorney General is authorized to intervene in all court and agency proceedings where antitrust matters are in issue. Conn. Gen. Stat. § 35-32(b).

The Attorney General is authorized to enforce the Act as parens patriae to recover damages to persons residing in the state. Conn. Gen. Stat. § 35-32(c)(1).

The Attorney General is authorized to enforce the Act through class action to recover damages to persons residing in the state. Conn. Gen. Stat. § 35-32(c)(1).

The Attorney General is authorized to enforce the Act as parens patriae to recover damages to the state's general economy. Conn. Gen. Stat. § 35-32(c)(2).

The Attorney General is authorized to enforce the Act as parens patriae to recover damages to the general economy of all political subdivisions of the state. Conn. Gen. Stat. § 35-32(c)(2).

The Attorney General is authorized under the Act to recover, under federal antitrust laws for damages to persons residing in the state and to the state's general economy. Conn. Gen. Stat. § 35-32(d).

The Attorney General is authorized to secure injunctive relief whenever there is a threatened loss or damage to the state's business or property. Conn. Gen. Stat. § 35-34.

The Attorney General is authorized to recover damages to the state's business or property. Conn. Gen. Stat. § 35-35.

The Attorney General is authorized to recover civil penalties. Conn. Gen. Stat. § 35-38.

The Attorney General is authorized under the act to enforce federal antitrust laws on behalf of the state, its municipalities, school districts and other political subdivisions. Conn. Gen. Stat. § 35-44a

In order to assist the Attorney General in pursuing the broad mandate and responsibility given under the Connecticut Antitrust Act, the Attorney General is also granted broad investigatory authority, Conn. Gen. Stat. § 35-42, including: the authority to issue subpoenas for documentary materials, Conn. Gen. Stat. § 35-42(a); the authority to issue subpoenas for testimonial hearings, Conn. Gen. Stat. § 35-42(e)(1); and the authority to issue written interrogatories. Conn. Gen. Stat. § 35-42(e)(2).

The remedy scheme of the Connecticut Antitrust Act is likewise designed to provide every incentive for the Attorney General to enforce the Act. Like its federal counterpart, the Connecticut Antitrust Act is designed to stimulate its enforcement. Successful plaintiffs are awarded treble damages plus reasonable attorneys' fees and costs of suit. Conn. Gen. Stat. §§ 35-34 and 35-35. The purpose of providing treble damages plus an award of attorneys' fees and costs is to provide a means for plaintiffs with scarce resources to enforce the antitrust laws. These provisions are essential to achieve the remedial purpose of the antitrust laws. See, e.g., Blue Shield of Virginia v. McCready, 457 U.S. 465, 472 (1982); Reiter v. Sonotone, 442 U.S. 330, 344 (1979) (" Congress created the treble-damages remedy of § 4 precisely for the purpose of encouraging private challenges to antitrust violations. These private suits provide a significant supplement to the limited resources available to the Department of Justice for enforcing the antitrust laws and deterring violations").

That the legislature intended this same incentive to assist enforcement by the state is apparent since the Connecticut Antitrust Act affords an award of attorneys fees even to the state -- a clear recognition that an addition to the state's resources is beneficial in furthering the enforcement scheme. Conn. Gen. Stat. § 35-34 and 35-35.

Under federal antitrust law, awards of attorneys' fees to State Attorneys General have been held to advance the antitrust laws enforcement objectives. See Illinois v. Sangamo Const. Co.,

657 F.2d 855, 860 (7th Cir. 1981) ("We conclude that recovery of reasonable attorneys' fees by Illinois will create greater incentives for state enforcement of the antitrust laws...."). Under federal antitrust law, attorneys' fees are awarded both for work performed by Assistant Attorneys General and for work performed by outside counsel retained by the State. E.g., Arizona v. Maricopa County Medical Soc., 578 F. Supp. 1262 (1984). Thus, the scope of the mandate provided to the Attorney General and the overall policy embodied in both federal and state antitrust law creates a clear legislative intent that the ability of the Attorney General to pursue antitrust violations should not be hampered. [As a remedial statute, the Connecticut Antitrust Act must be liberally construed to foster its remedial objectives. See e.g. , Starr v. Commissioner of Environmental Protection , 226 Conn. 358, 382 (1993); Mobil Oil v. Killian , 30 Conn. Sup. 87, 91(1973).]

The Antitrust Revolving Fund's Creation and Abolishment Were Intended To Foster Enforcement

Against the backdrop of an entire statutory scheme designed to encourage and facilitate enforcement, the Court is asked to decide whether Conn. Gen. Stat. §35-32a is the sole provision within the Connecticut Antitrust Act designed to curtail the Attorney General's enforcement mandate.

The Attorney General has been called upon by the legislature to manage a large array of responsibilities under the Connecticut Antitrust Act. Prior to the establishment of the Antitrust Revolving Fund in 1976, the Attorney General has discharged his duties under the Act by drawing on two different resources: (1) the Attorney General's budget to pay for litigation expenses and in-house lawyers and staff; and (2) contingency fee contracts and attorneys' fees awards to pay for outside counsel. See Plaintiff's Exhibit J, Contracts Nos. 2, 3 and 4, and Plaintiff's Supp. Exhibit 37. Neither the establishment of the Antitrust Revolving Fund nor its abolition was designed to reduce the availability of these two options.

The Antitrust Revolving Fund was not part of the original statutory scheme. It was established in 1976 as Public Act No. 76-327 (copy attached as Plaintiff's Supp. Exhibit 33), 5 years after the enactment of the Connecticut Antitrust Act. As originally enacted, the Revolving Fund Act allowed up to 10% of certain funds collected in relation to antitrust enforcement to be placed into the revolving fund. The Act provided that the funds could be used for "the payment of costs, expenses and charges incurred in the preparation, institution and maintenance of anti-trust actions under state and federal anti-trust acts." 1976 Conn. Pub. Acts No. 76-327 § 2.

The legislative history makes clear that the Antitrust Revolving Fund was created to augment existing resources and practices. The House sponsor of the Bill was Representative Healey. In introducing the Bill on the floor of the House, Representative Healey stated:

We do have an anti-trust law in the State of Connecticut. The Attorney General was charged with the enforcement of that anti-trust law. For proper investigation it is necessary that the Attorney General expend funds on investigators, on the hiring of CPA's, hiring Court reporters to take testimony that sort of thing. Now the other side of the coin, there are certain circumstances, where, under the State of Connecticut, receives a part of a judgment against an anti-trust violator. What this bill proposes is that there be created a revolving fund in the custody of the state treasurer but available to the Attorney General for use by him in meeting these various expenses of the investigation of anti-trust violations. This in no way has any impact on our budget because the amounts which the Attorney General does recover for the State of Connecticut in these antitrust awards are not budgeted items. We don't have the slightest foggiest notion how much he will collect, we don't have the slightest foggiest notion of when he will collect until after it is done and, accordingly, these recoveries by him on behalf of the State of Connecticut do not enter into the finance committees package on revenues. It provides a reasonable method of financing these investigations, it provides that the proceeds of the recoveries should be used to carry on further investigations which may create additional proceeds.

19 Conn. H.R. Proc., Pt. 5, 1976 Sess., p. 2102-03 (April 14, 1976)(remarks of Rep. Healey) (attached hereto as Plaintiff's Supp. Exhibit 34)

Another proponent of the Bill, Representative Morano, noted:

[T]he Attorney General indicated that his office is called upon many times to investigate cases to higher [sic] people with expertise in a certain subject matter and he does not have the funds to do this. Now it would seem to me that if that office is to carry out its functions it should have the tools to do it, in this case, money. It's not going to cost the taxpayer anything.

19 Conn. H.R. Proc., Pt. 5, 1976 Sess., p. 2108 (April 14, 1976)(remarks of Rep. Morano)(attached hereto as Plaintiff's Supp. Exhibit 34)

Thus, as envisioned by its creators, the Antitrust Revolving Fund was designed, not to affect the way that the Attorney General was able to hire lawyers to enforce the antitrust act, but rather to provide a way of supplementing appropriated funds for funding costs such as experts, court reporters and investigators. These were expenditures the Attorney General's office was required to pay even when outside counsel were employed since outside counsel could not at the time provide such costs on a contingent basis due to existing ethical rules. [Connecticut law has now changed so that it is permissible for lawyers to pay the costs of litigation on a contingent basis. Rules of Professional Conduct 1.8(e)(1). During oral argument, the Court questioned whether Rule 1.8(e)(1) is equally applicable to government and private clients. Because nothing in the language of the Rule states otherwise, and the comments to Rule 1.11 note that "[a] lawyer representing a government agency, whether employed or specially retained by the government, is subject to the Rules of Professional Conduct," it must be assumed that Rule 1.8(e)(1) applies to government clients.] The practice of hiring contingent fee counsel in antitrust matters continued after the creation of the revolving fund, in the same manner as it had prior to the creation of the fund. (Plaintiff's Exhibit J, Contracts Nos.1 and 5, and Plaintiff's Supp. Exhibit 38.)

The Antitrust Revolving Fund was amended again in 1980 by Public Act 80-111 (copy attached as Plaintiff's Supp. Exhibit 35). This amendment, rather than authorizing 10% of certain moneys to be deposited into the fund, provided that "all" of those class of moneys be deposited into the fund up to a cap of $1 million. This change was simply a direction that moneys that otherwise were going into the general fund should now be deposited in the revolving fund. The amendment also broadened the class of moneys that could be deposited into the fund so as to provide for more money in the fund.

The legislative history recognizes the importance to the State of the Attorney General's antitrust enforcement mission. The Senate sponsor of the Bill noted:

Simply without passage of this act, the anti-trust unit of the Attorney General's Office would be disbanded. Major pending cases at this time consist of a massive price-fixing case against major oil companies as well as price-fixing cases against an apparel manufacturer, sugar refiners, plywood manufacturers, water device manufacturers, armor car companies, fine paper manufacturers, and so on and so on. [Of these then pending cases of which the legislature was aware, the sugar refiners case, the plywood case, the armor car case and the fine paper case were being handled by outside counsel on a contingent fee basis. See Plaintiff's Exhibit J, contracts Nos. 1 and 4; Plaintiff's Supp. Exhibits 37 and 38. ]

23 Conn. S. Proc., Pt. 4, 1980 Sess., p. 1215 (April 15, 1980) (attached hereto as Plaintiff's Supp. Exhibit 36).

Attorney General Ajello explained to the General Law Committee of the General Assembly the purpose of the amendments. Attorney General Ajello's testimony recounts that the in-house lawyers at the Attorney General's office available for antitrust enforcement had been reduced due to "budget retractions." Attorney General Ajello wanted the Antitrust Revolving Fund to contain more money that could be used to pay for in-house lawyers, a practice that he preferred in many instances to the

historical reliance on outside contingency fee counsel. Attorney General Ajello explained:

When these [antitrust] cases are concluded normally and money is received, it is found money in the sense that it was not budgeted as income. However, the cases are very expensive to participate in because of.. usually they are tried away from this state in some central location such as Chicago, or the west coast, or some other major population center. In most cases in the past, most of our significant cases have been handled by private counsel, which means that part of our recovery goes to pay counsel fees....

[W]hat our proposal is, and this has been done in other states, ...is that the limitation on the fund be removed at the $250,000 level and that funds be allowed to accumulate in that fund up to a million dollars, that being a new ceiling and that the income from that fund then be allowed to help offset the cost of operating the [in-house antitrust] unit. This would mean overall that the state would receive more money, I think, because we would use private counsel, outside counsel, in many fewer instances so that in the long run we, the state, would get more benefit.

Conn. Joint Standing Committee Hearings, General Law, p. 458 (March 12, 1980)(remarks of Attorney General Ajello)(attached hereto as Plaintiff's Supp. Exhibit 40). The 1980 amendment, therefore, while hopeful of reducing the number of times contingent fee counsel would be necessary, was not designed to eliminate the ability of the Attorney General to hire outside counsel when he deemed it appropriate.

Unfortunately, Attorney General Ajello's plan for funding in-house counsel through the revolving fund had a flaw -- cash flow. The Revolving Fund was used by the Attorney General's Office to fund four in-house attorney positions. In his testimony to the legislature, Attorney General Lieberman recognized that a General Assembly appropriation for these positions would be a more stable funding source. Attorney General Lieberman asked that the in-house attorneys being funded through the Revolving Fund be paid instead through regular appropriations. If that were done, and only if that were done, he would have no need for the revolving fund and it could be

abolished. Conn. Joint Standing Committee Hearings, Judiciary, pt. 7 1985 Sess., p. 2077 (Statement of Attorney General Joseph Lieberman)(copy attached as Plaintiff's Supp. Exhibit 39). Attorney General Lieberman's request to abolish the revolving Fund was made in order to facilitate the enforcement powers of the Attorney General, not limit them.

The purpose of Public Act 85-410 (attached hereto as Plaintiff's Supp. Exhibit 41), which is now codified as Conn. Gen. Stat. § 35-32a, was to do just that -- provide direct appropriations for in-house lawyers and to abolish the Revolving Fund. The Act simply required that the moneys that had been being deposited into the Revolving Fund would from then on be deposited into the General Fund. Prior to 1985, moneys paid to outside counsel by contingent fee or court award were not deposited in the Antitrust Revolving Fund. Nonetheless, all moneys awarded to the State for attorneys fees in excess of that which was to be paid to outside counsel was to be deposited in the Revolving Fund, and after 1985, into the General Fund.

Public Act 85-410 was intended only to take the existing Revolving Fund and abolish it by providing that the moneys that had theretofore been deposited in the fund would henceforth be deposited in the General Fund. Since fees of outside counsel were not funds that were deposited in the Revolving Fund, Public Act 85-410 had no effect on the method that had theretofore been used to pay such fees.

The history of the Antitrust Revolving Fund makes clear that successive Attorneys General hired outside counsel paid by contingent fees or court awards both prior to the enactment of the Fund and during its existence. Neither the creation nor abolition of the fund was intended in any way to affect this practice.

CONCLUSION

For all of the foregoing reasons, and the reasons set forth in the Plaintiff's Memorandum in Opposition, the defendants' motion to disqualify counsel or for other relief with respect to the contingent fee Agreement should be denied.

PLAINTIFF

STATE OF CONNECTICUT

BY: ______________________________

RICHARD BLUMENTHAL

ATTORNEY GENERAL

JURIS No. 403804

P.O. BOX 120

HARTFORD, CT 06141-0120

TEl: (860) 566-2026

JANE R. ROSENBERG

WILLIAM M. RUBENSTEIN

ELIOT D. PRESCOTT

STEPHEN R. PARK

ASSISTANT ATTORNEYS

GENERAL

110 SHERMAN STREET

HARTFORD, CT 06105

TEL: (860) 566-5374

CERTIFICATION

I hereby certify that a copy of the foregoing has been hand delivered or mailed first-class, postage prepaid, on this 13th day of February, 1997, in accordance with the Master Service List.

______________________________

Stephen R. Park

Assistant Attorney General

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