July 8, 2011, Cheryl Hanna: Vermont Likely to Foot Legal Bill No Matter Who Wins

I and a faculty colleague recently received a question for a reader about Act 47 and the provision that gives Vermont the authority to bill back costs associated with litigation in state or federal courts that involve an entity holding a certificate of public good.  The Act was passed late last session and there was little testimony on the bill.
A copy of Act 47 is here: http://www.leg.state.vt.us/docs/legdoc.cfm?URL=/docs/2012/acts/ACT047.pdf

The relevant language is in section 20n on page 92, which amends 30 VSA section 20 by adding the following:

(15) proceedings before any state or federal court concerning a company
holding or a facility subject to a certificate issued under this title if the
proceedings may affect the interests of the state of Vermont. Costs under this subdivision (15) shall be charged to the involved company pursuant to subsection 21(a) of this title. In cases where the proceeding is generic in nature, the costs shall be allocated to companies in proportion to the benefits sought for their customers from such advocacy.

Our reader asks:
1. Can the state enact, and then exercise, powers granted under that law in a manner that directly impacts litigation that was pending at the time of the bill’s passage?
2. Can the state enact a law requiring a party to pay the state’s litigation expenses in an adversarial proceeding before the federal courts?

So, let me begin by saying that, like many Vermonters, I think it is likely time for Vermont Yankee to decommission. I also appreciate that reasonable people disagree about VY and what its future should be. And I have the utmost sympathy for the employees of Entergy who are caught in the middle of this legal mess. I should also state that I have no personal stake in the outcome of the case and I have complete academic freedom in my role as a professor of constitutional law. What I try to do here is offer my objective legal analysis about Act 47 in response to our reader’s questions.

When Act 47 was being debated, I was concerned that the Vermont Legislature might be over-reaching by suggesting that Entergy had to bear the entire cost of litigation. So. I looked at the legislative record, did some research and chatted with my colleagues. It is my humble yet considered judgment that not only is the law unenforceable, but it is also likely unconstitutional.

Here’s why:

The general rule in the United States is that each party pays its own attorneys’ fees.  This is known as the “American Rule.” This contrasts with the “English Rule” in which the losing party pays the prevailing party’s fees. The rationale behind the American Rule is that people should be encouraged to enforce their legal rights without fear of having to pay the other side’s costs if they lose. Some claim the rule encourages too many lawsuits. (You can debate with friends whether you think the American Rule or the English Rule is preferable.)

There are exceptions to this rule. For example, two parties can agree in a contract that one side will pay the other’s fees if there is a lawsuit.  Also, states can require one party to pay the other’s fees when that party acts unconscionably or in bad faith. Many of the statutes that require the losing party to pay attorneys’ fees are intended to protect consumers who are mistreated or harmed by companies behaving badly. Other examples include class actions, anti-trust violations and patent infringements.

The most notable exception to the American Rule is that the state must pay the attorneys’ fees of the plaintiff when the state violates the constitutional rights of the party brining the lawsuit.  These claims are usually filed under 42 U.S.C. Section 1983. It reads that the “court, in its discretion, may allow the prevailing party … a reasonable attorney’s fees as part of the costs.” This provision deters the state from acting in an unconstitutional manner and encourages plaintiffs to bring civil rights lawsuits. When a state violates your constitutional rights, such as censoring your free speech, you usually suffer no financial harm.  It is a matter of principle. One way to encourage attorneys to take these cases is to provide a means of getting fees if the state loses.

Vermonters should by now be well familiar with these sorts of civil rights cases. The state of Vermont had to pay attorneys’ fees in the 2006 campaign finance case to the tune of more than $1 million.  More recently, Vermont paid $150,000 to the attorneys of a Rutland man after the state refused to issue him a vanity license plate with a religious message. And with the recent loss of the data mining case before the U.S. Supreme Court, Vermont will likely have to pay more than $1 million to the attorneys who represented the companies that brought that lawsuit.  It doesn’t matter under Section 1983 if plaintiffs are rich or poor, corporations or individual humans. If the state violates the Constitution, it pays.

Because Entergy is claiming the state is violating its constitutional rights, it has invoked Section 1983 under its claim that the state has violated the Commerce Clause and has requested fees. That theory is not the centerpiece of Entergy’s case, but if Vermont loses the case on certain grounds, Entergy would be legally entitled to a reasonable amount of the costs that it incurred in the lawsuit. Federal law would certainly prevail here despite what Act 74 says, making it irrelevant.  And those fees could be significant. Start at seven figures and keep counting.

But let’s assume that Vermont actually prevails (unlikely in my opinion, but that’s another post). One theory under which it could prevail is that Entergy breached the memorandum of understanding, which essentially was a contract, by filing a federal preemption challenge. In that case, Vermont would be entitled to request damages and those damages could include the cost to the state for its attorneys’ fees. But the state doesn’t need Act 74 to request contract damages – that is just basic contract law. Again, Act 74 becomes irrelevant.

Now let’s assume the court ultimately finds that Vermont is within its powers not to issue a certificate of public good on the simple (yet unlikely) theory that it was concerned about something other than safety when it passed Act 160, and in its actions that followed. Could the state invoke Act 74 to require Entergy to pay our fees?  I think not.
First, a law requiring a company to pay attorneys’ fees to the state when the question is whether the state violated the Constitution is unprecedented.  To my knowledge—and someone can correct me if I am wrong—no state has tried to enforce such a broad law. Because it runs contrary to the American Rule, there has to be a rational basis to change the usual rule. Generally, when a law requires attorneys’ fees be paid, it is to deter a party who holds power relative to the other party from acting in bad faith or exploiting consumers. Even if Entergy loses, a federal court is not likely to find that it acted in bad faith.  Nor does Act 74 require a litigant to have lost the litigation to be subject to it. Furthermore, the only rationale in Act 74 is that claims against the state “may affect the interests of the state of Vermont.” That is circular reasoning.  I read the statute as saying anytime a regulated industry subject to a certificate of public good sues the state over any legal question, whether it wins or loses the case, it would have to pay all costs. That is just ludicrous.  The effect of the law is to deter companies that need a certificate of public good from suing the state, or to punish them when they do. No court is likely to uphold such a law given its sweeping scope and effect.

Second, it’s clear from the legislative history that the bill was targeted at Entergy in the midst of a highly publicized and controversial law suit. And that raises a host of constitutional problems.  To begin with, the state can’t pass ex post facto laws. These are laws that change the legal consequences of actions that began before the law was enacted. While generally the prohibition against ex post facto laws applies only to those laws that are punitive, Entergy has a pretty good argument that Act 74 was intended to retaliate against it for bringing the lawsuit, thereby making it punitive in application. Next, the state can’t pass a “bill of attainder.” Similar to ex post facto laws, a bill of attainder is a law that essentially punishes a person (including corporations) without the benefit of a judicial trial. While it is questionable whether Act 74 would meet the precise legal definition of a bill of attainder, Entergy would most certainly have a colorable argument that it does.

Finally, there is an argument that Act 74 violates the broader due process rights of Entergy.  The most fundamental principle of constitutional law is that a state law can not be unreasonable, arbitrary or capricious when depriving someone of life, liberty or property (money is property).  It is not at all clear to me that Vermont could make a case that Act 74 was passed for any other reason than to retaliate against Entergy. True, there was testimony from the state’s lawyers that bill-backs are a common practice with regulated industries. (Look for an upcoming post by my colleague, Don Kreis, explaining how this works and why such bill-backs are significantly different from the bill-back provision in Act 74.) Thus, no matter how politically satisfying it may be to try to assure Vermonters that this law suit would cost us nothing, the state can not target a disfavored or politically unpopular industry by saying: If you sue us, you pay.

And remember, if a court does find that Act 74 indeed violates the Constitution, than Vermont is subject to a Section 1983 claim, including the attorneys’ fees that Entergy incurred fighting it.

So, it is my prediction that if Vermont ever tries to enforce Act 74, even if it prevails in its lawsuit with Entergy, it is Vermont’s taxpayers, not the Louisiana corporation’s shareholders, who will ultimately foot the bill.

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5 Responses to July 8, 2011, Cheryl Hanna: Vermont Likely to Foot Legal Bill No Matter Who Wins

  1. Don Kreis says:

    What the Legislature did in Act 47 (which, for those who keep score, is the enacted version of what was known during the session as H.56, the comprehensive energy bill) makes a litlte more sense if it is considered in the context of longstanding principles of utility regulation.

    There is a long history, enshrined under Vermont law in sections 20 and 21 of title 30 of the Vermont Statutes Annotated, of sending utilities the bill for the cost of being regulated. But, make no mistake, this doesn’t mean the company pays — the customers do. The typical situation in which this occurs is a rate case — i.e., a proceeding in which the Public Service Board investigates and rules on a utility proposal to increase its rates. The Board has made clear that “[r]ate case expenses are a legitimate cost of service and are therefore subject to recovery from ratepayers.” In re Shoreham Telephone Co., 2004 WL 2791514. Sections 20 and 21 make clear that we’re not just talking about the utility’s own regulatory costs but that of the government — i.e., both the Public Service Board and the Public Service Department.

    The problem for Entergy, of course, is that it can’t ask the Board to allow it to include litigation costs in its rates. As I have now observed several times in other contexts, Vermont Yankee is a merchant generator and its rates — i.e., ,the prices it charges wholesale customers — are the result not of regulatory determinations of just and reasonable costs but, rather, the result of competitive business negotiations. (Note: Once upon a time, under the Federal Power Act, the Federal Energy Regulatory Commission set the rates for wholesale generators like Vermont Yankee, but that’s a bygone era — now the FERC simply assumes that if your generator lacks market power (i.e., is able to behave like a monopolist for some reason), any contract the generator negotiates is just and reasonable. Whether this is an abdication of the FERC’s obligation to assure that such rates are just and reasonable, particularly as circumstances change over the course of a longterm contract, is a topic for another day.)

    Thus, by passing a statute that taxes Vermont Yankee with the state’s cost of defending the lawsuit, the Legislature has imposed a cost on Entergy that it cannot recover. The constitutionality, legality, and fundamental fairness of such an enactment in these circumstances has been ably and thoughtfully analyzed by my excellent colleague Cheryl Hanna, above. The only thing I would add is that Entergy would, in theory, have the right to come before the Public Service Board to argue about the reasonableness of those charges. That would certainly be an entertaining hearing — watching the litigants incur costs by arguing about incurring costs.

  2. Atomikrabbit says:

    Thank you for your impartial and well thought-out commentary.

    The people of VT need to become aware of the liabilities that the incompetent politically-motivated staff of the AG office, and some of their elected officials, are subjecting them to.

    I am not too surprised that unconstitutional and selectively punitive laws are being enacted by representatives of what is becoming the Progressive Socialist Peoples Republic of Vermont. It’s too bad it has come to this.

  3. Bob Stannard says:

    Dear Ms. Hanna,

    I would ask that perhaps you might clarify how it is that you would prefer that we believe you to not be siding with Entergy, yet in your opening comments you say that you “have the utmost sympathy for the employees of Entergy who are caught in the middle of this legal mess.”

    I think that we all sympathize when innocent bystanders are caught in the middle, but these employees have been put in this position by their employer; Entergy. It was Entergy who cut corners, deferred maintenance and allowed its plant to collapse. It was Entergy officials who misled us, under oath, and ruined its credibility with Vermonters.

    It’s acceptable to feel badly for those not responsible, but I fail to understand how you can continue to support the corporation that has self-inflicted its own wounds.

    They are suing Vermont not on the language in the laws that have been passed, but instead on some sort of conspiratorial plot. As a lawler it would seem to me as though you would side with those who suggest that it should be the words that prevail; not a cooked up argument over intent.

    Then again, you may just be playing Devil’s Advocate.

    • Meredith Angwin says:

      Ms. Hanna, having sympathy for workers who may be laid off does not make you pro-nuclear. It means you are human.

      Mr. Stannard seems to think that anyone who has sympathy for anyone is pro-nuclear. This is true whether the people with whom you have sympathy are nuclear employees, or they are Japanese people drowned by a tsunami. Stannard has been banned from posting on my own blog since he posted this remark a few days after the tsunami:

      “The unfortunate catastrophe in Japan may have been the result of devine intervention. This event will bring the so-called nuclear renissance to an end. That will not only save taxpayers billions of dollars, but it will, in the end, save lives.”

      He posted this as a comment on March 13, while the Japanese people were still looking through the rubble for their dead. His view of Divine Intervention seems to be: “It doesn’t matter how many people die, as long as the end result is Bad For Nuclear.”

      Thank you and Mr. Kreis for your sympathy with the side you oppose, and for your clear explanations of these legal issues.

  4. Cheryl Hanna says:

    Tom – Thanks for the heads-up on the typo. Act 47 is just that. There is only one was that we were asked about, so when I wrote Act 74, it was a brain misfire! I am a bad typist and even worse proof-reader. My students once gave me a shirt that said, “Bad Spellers of the World Untie!”

    And to our other readers, I am glad you find our analysis helpful. I speak only for myself when I say that I am no fan of Entergy and have serious doubts about the NRC and its regulation of industry. But my main concern is that Vermonters understand the legal complexities of the case and that the state not take unnecessary actions that put taxpayers at risk. Reasonable people can disagree and I hope that this blog helps inform debate.