State attorney general actions: Strategies for venue and settlement differ from typical litigation

February 16, 2023 – Litigation against a state attorney general can be catastrophic for the company on the receiving end of the confidential regulatory investigation that precipitated the filing of a complaint. When a state attorney general makes the previously unknown regulatory investigation public, a company will likely face negative publicity, customer or consumer questions, outrage, regulatory scrutiny, and private lawsuits. And that is before taking into account the business opportunities, employee recruitment efforts, goodwill in the marketplace, and valuations that are all likely to suffer in the wake of an investigation being made public.

Many companies and their outside counsel mistakenly believe that the same tactics they employ for typical litigation against the plaintiffs’ bar or commercial competitors would be just as effective when litigating a state attorney general action. Relying on these same tactics, however, could cost companies dearly because litigation initiated by state attorneys general differs significantly from litigation initiated by private plaintiffs.

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In the first part of this two-part series, we discuss three reasons why litigators must approach state attorney general actions differently than typical litigation:

(1) Unlike private plaintiffs, state attorneys general can and usually do investigate companies before filing a lawsuit.

(2) State attorneys general are motivated by public policy considerations.

(3) Changes within state attorneys general offices can affect the direction of a suit.

There are two additional reasons why litigators should approach these two kinds of actions differently. State attorneys general may have procedural advantages in that venue normally remains in state court; and they could have leverage in settlement discussions when civil penalties were available. Both concern the way litigators must engage with state attorneys general in the litigation trenches.

Litigation involving state attorneys general will almost always take place in state court.

Unlike typical litigation where significant cases are often filed in federal court or defendants can often remove a case from state court to federal court, litigation brought by a state attorney general generally proceeds in state court because, typically, such cases are not removable. State attorneys general often do not include federal claims that would give rise to question of federal jurisdiction, and because a state is not deemed a “citizen” in federal law, diversity jurisdiction is inapplicable.

State courts, on balance, are typically less defendant-friendly than federal courts, and out-of-state defendants who use outside counsel are typically not familiar with local practice in state courts — especially not to the degree that assistant attorneys general, who practice primarily in those same state courts, are. Thus, state attorneys general have an inherent advantage in their choice of forum.

This procedural advantage adds another set of considerations to a defendant’s litigation strategy as the company will need to comply with both state rules of civil procedure and particular state courts’ customs. This latter point is important, as many state courts are averse to ruling on — let alone granting — early dispositive motions or motions for summary judgment. Given that a defendant might be haled into court across the country from its headquarters, the defendant will need to have a legal team that is familiar with various venues, relationships with local counsel who can help them navigate local court rules and customs, and an ability to trust and rely on local counsel for advice and counsel more than usual.

Civil penalties can be severe – and create immense leverage for state attorneys general in settlement discussions.

In typical litigation, defendants could be forced to pay compensatory damages, punitive damages, and attorney fees; they may also confront the prospect of an injunction. Even if they settle a case, corporate defendants often must write permissible checks and perhaps even agree to a monitor, injunctive relief, or operational business changes as part of the settlement.

When defending litigation brought by a state attorney general, however, the defendants must grapple with a far more concerning type of remedy: civil penalties. Depending on the claims asserted, civil penalties, when available, can amount to thousands — if not tens of thousands — of dollars per violation. That “per violation” issue creates the real threat.

Case law across the country remains relatively undeveloped, and the corresponding statutes are silent, as to what the term “per violation” means. Although highly fact- and circumstance-specific, there is almost always a risk a state court could interpret such language to mean “per impacted consumer,” which raises the prospect of astronomical exposure and an existential threat to the company.

Moreover, certain violations of state law, such as acts of state false claims, can result in a company being placed on a “blacklist” that prohibits the state from doing business with that company for some defined period (up to, for example, 10 years) . If the business at issue depends significantly on government contracts, debarment can pose another existential threat to the company, independent of civil penalties. Exacerbating the extent of this threat is the requirement adopted by most states and federal agencies that a company must disclose whether it has been sued or debarred by any other government agency, which could affect its ability to win future government contracts in other states.

For this reason, when debarment or loss of a license is on the table as a remedy, state attorneys general can often obtain considerable concessions in a settlement. Defense counsel must prepare themselves and their client for the possibility that these civil penalties could give a state attorney general a good deal of leverage during settlement negotiations. Understanding these leverage dynamics could influence a defendant’s litigation strategy from the get-go to avoid being forced to choose from only suboptimal settlement options.

A fresh strategy will be required for these venues and settlement considerations.

Given how powerful venue and settlement considerations can impact litigation, in-house or outside counsel would be well-advised to think differently about how they approach venue and settlement when defending state attorney general actions. If they were to employ the same strategies they employ in typical litigation, they could quickly find themselves in a vulnerable position regarding their options for a favorable resolution.

No general counsel wants to have that conversation with their C-suite or board. Accordingly, it is imperative that lawyers advising corporate defendants facing a state attorney general lawsuit recognize the case for what it is: a special type of litigation that requires unique strategies and tactics that are not commonly deployed in run-of-the-mill litigation with private plaintiffs.

Ketan Bhirud, a counsel at the firm, contributed to this article.

Ashley Taylor is a regular contributing columnist on attorney general investigations for Reuters Legal News and Westlaw Today.

Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence and freedom from bias. Westlaw Today is owned by Thomson Reuters and operates independently of Reuters News.

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