Chief Executive Magazine, April 1998

"Sometimes a lawsuit is no better than blackmail or theft," says Al Dunlap, chairman ad CEO of Sunbeam Corp. The never-shy Dunlap was addressing this question: Will lawyers destroy capitalism? His sparring partner was William Lerach, senior partner of Milberg, Weiss, Bershad, Hynes & Lerach, which specializes in class action securities litigation.

The debate, sponsored by the Federalist Society -- a classic liberal-leaning lawyer's group--raised important questions: Does Adam Smith's invisible hand, through which individuals pursuing their narrow aims in commercial society end up contributing to the public good, apply to legal entrepreneurs? If private lawyers don't ferret out market fraud, is the only other option intrusive government regulation?

"Incentives in the free market are profit, whether in business or law," Dunlap told the audience. "In business, the best avenue for long-term success is competitive products and pricing. In law, the most effective strategy for making money is to sue early and often."

Complaining of class-action suits in which supposed victims recover little while lawyers make millions, Dunlap told the lawyer-filled room, "In that case, nobody benefits--not society, not he plaintiffs, not the business community. Nobody except the class-action lawyers who, in this case, are nothing but parasites feeding off society."

Indeed, the early and often, as well as the profit imperative is well-illustrated by Lerach. He claims to have sued 15 percent of Northern California's high-tech companies, including such giants as Apple, Hewlett-Packard, and Intel; some more than once. Seagate Technology, a leading maker of computer disk drives, has been hit by Lerach no less than four times. In a recent two-year period, Lerach's firm settled 106 cases for an average of $9.6 million each, according to Securities Class Action Alert. During the past 20 years, Lerach claims to have extracted $5 billion from firms, taking a cut of 22 percent to 28 percent of the total.

"They always offer you a good business decision: You can give me $5 million and walk away free or you can go to court and spend $5 million and take your chances," Cypress Semiconductor CEO T.J. Rodgers told USA Today.

In 1995, Congress passed a law designed to dam the flow of strike suits. But the law of unintended consequences has taken hold. Not only has the total number of suits not declined, but Lerach has increased his firm's market share from a pre-reform 31 percent to a post-reform 59 percent.

William Lerach mounted a defense of his chosen profession and tactics. "I think that there is an important role for profit-oriented private lawyers to play in a free-market economy to help ensure capitalism will continue to survive and prosper."

Like the anti-trust bureaucrats who attack free enterprise in the name of free markets, Lerach defends his aggressive filing of lawsuits as necessary to police private markets. Says Lerach, "Private enforcement of the law, guided by the profit motive, overseen by an independent federal judiciary, working within laws we have all agreed upon through our elected representative, [has a] useful role to play," in keeping markets strong and fair.

But he makes no apologies for doing well from doing good. "Who stood up to the tobacco industry and why? It was lawyers like myself," Lerach stated. "And we didn't do it for our health; we did it for the money."

But might not the tobacco situation, in which tobacco companies stand willing to pay more than $365 billion in extortion money, support Dunlap's parasite thesis, rather than Lerach's Robin Hood claims? Who stands to benefit from any tobacco settlement? Lawyers, interest groups and politicians, all of which get a cut of the money.

Who pays? Smokers, a group of people not known for their affluence, will pay billions of dollars in higher prices or their chosen habit.

Perhaps all the questions raised by the Lerach/Dunlap debate can't be answered. While it is clear that lawyers, who after all have great influence over the law, are gaming the system. But Lerach is also correct when he points out that markets must be policed for fraud, either by private individuals or by government regulators. When asked whether he would prefer government regulation to lawyers, Dunlap characterized the question as a Hobson's choice, like asking whether he would rather be hung or shot. Honest executives should face neither government gallows nor a firing squad of lawyers. But considering the results of the 1995 securities class action reform, it's not clear that our policy-makers know how to achieve this balance.

'In law, the most effective strategy for making money is to sue early and often.'