Arbitrators Reject State Request to Reduce Fees

Setting the stage for an unusual legal fight, private arbitrators Thursday rejected Gov. Gray Davis’ plea that they reconsider a decision granting attorneys a record $88.5 million award against the state.

At the same time, Controller Kathleen Connell, acting at Davis’ request, refused to write the $88.5 million check--despite a Thursday deadline for dispersing the money, imposed by the arbitrators in their original ruling last month.

“There is not going to be any payment,” Connell said, adding that the state will sue to have the arbitration decision overturned. “This fee amount is outrageous.”

Lawyers who stand to receive the money--thought to be the most ever awarded in attorney fees in a suit against the state--could not be reached Thursday. But the law firms, including one that is a major campaign donor to Davis and other Democrats, have shown no sign of agreeing to lower their fees; they battled attempts by the state to have the arbitration panel reconsider its ruling.

Thursday’s decision was a 2-1 vote, with one of the three panelists, retired California Supreme Court Justice Malcolm Lucas, urging that the state’s request to reconsider the $88.5 million award be granted. Davis had selected Lucas as his representative on the panel.

“We’re going to confer with our client, the governor, and determine what the next steps are to be taken,” said Nathan Barankin, spokesman for state Atty. Gen. Bill Lockyer, who is representing the state in the case.

The award stems from a series of suits filed in 1995 over a $300 fee the state charged to people who registered out-of-state cars in California. More than a million people paid the “smog impact” fee during the 1990s.

After a Superior Court judge in 1998, and then a state court of appeal last year, ruled the fee unconstitutional, Davis dropped further appeals. He also agreed to grant refunds, with interest, to everyone who paid the fee, for $665 million.

As part of the legislation authorizing the refunds, Davis pushed to have the question of attorneys’ fees decided by private arbitrators rather than allow them to be decided by the courts.

Davis since has said he expected the panel to give the lawyers less than the $18 million that the Superior Court judge had awarded them in 1998.

In their decision Thursday, retired state Court of Appeals Justice John Trotter and former Superior Court Judge Bonnie Lee Martin noted that there is no evidence of a legislative history or the governor’s request to the Legislature to limit the attorneys’ fees to $18 million or less.

The legislation appropriating the money put no limit on how much the attorneys could be paid, the majority noted, nor did the arbitration agreement signed by the lawyers and the state. And the state made no mention of a cap in any briefs filed in the arbitration process that led to the award.

“The state chose to gamble and lost,” the majority wrote. “A party to a binding arbitration agreement should not be allowed to renege merely because it is displeased by an award.”

The majority also said they had “no authority under statute, case law or the parties’ agreement to arbitrate which would allow a reconsideration of the award on any of the grounds or for any of the reasons urged by the state.”.

“Even if the panel had the power to reconsider and change the decision, no compelling reasons to do so have been presented,” the majority said.

In a dissent, Lucas, while saying he was not sure that the original decision was wrong, urged that the panel reconsider it. He raised the possibility that any payment beyond the $18 million granted by the Superior Court judge in 1998 might be “an unconstitutional gift of public funds.”

Lucas appeared troubled by what he termed “political action” by attorneys. Lawyers and a Capitol lobbyist from at least one of the firms--Milberg, Weiss, Berhad, Hynes and Lerach--have disclosed in public filings that they helped shape the legislation authorizing the refunds and lawyers’ fees.

The firm is a major donor to Democrats, including Davis. The firm and its partners donated $221,000 to Davis in his 1998 campaign and $20,000 since he took office.