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Taxpayers picking up the tab for company's legal troubles

Published April 29, 2007 4:17 am

This is an archived article that was published on sltrib.com in 2007, and information in the article may be outdated. It is provided only for personal research purposes and may not be reprinted.

As lawmakers try to avoid a costly court fight over Utah's trademark protection program, they have taken the unusual step of making taxpayers pick up the legal fees for a private company caught up in litigation over another troublesome registry.

In August, the Attorney General's Office quietly hired private attorney Brent Hatch, who had been defending Unspam Technologies and its money-making interests in Utah's Child Protection Registry. So far, Hatch has been paid $100,000 - half of what his contract allows, Attorney General Mark Shurtleff said.

Unspam President Matthew Prince said Hatch's bills were threatening to strangle his company, adding the state would benefit from his lawyer's expertise. Hatch, son of U.S. Sen. Orrin Hatch, came up with many of the legal arguments that have prevailed in court, Prince said.

"If we shut down, that means the entire program shuts down," Prince said. "We went to the state and said, 'We just can't keep doing this.'"

It's a stunning development for a program that was supposed to generate millions of dollars for the state but is instead a financial flop. The situation also raises questions about the fate of Prince's other brainchild, the Trademark Protection Act, and a legislative process that conceals the potential legal costs of controversial bills.

The trademark law, set to take effect April 30, also was sold to lawmakers as a huge money-maker for Utah. The law allows companies to register electronic trademarks, providing a mechanism for them to sue competitors who try to use those keywords to sell their own products through Utah-based Internet searches.

"This bill will cost the state nothing," Rep. David Clark announced on the House floor during the last day of the legislative session, "In fact it may actually generate revenue."

Sen. Dan Eastman predicted "a nice little cottage industry could spring up and be profitable to all those who participate."

How profitable? With about 1.3 million patent holders, and a $250 state registration fee, Utah could reap a small fortune, Prince said last week during a coffee-shop interview. At the very moment he was touting the potential of the program, senior executives from Google, Microsoft, America Online and other new media giants were on Capitol Hill, arguing they would have no choice but to challenge the program in court.

Lawmakers wondered afterward why industry representatives hadn't spoken up during the session. Taxpayers may be wondering the same thing about lawmakers.

According to audio recordings of legislative proceedings, not a single legislator openly questioned the legitimacy, constitutionality or cost of the innocuous-sounding bill, despite written warnings from legislative analysts that it faced a "high probability" of being overturned in court.

As a result, the Attorney General's Office estimated it would cost $65,900 a year to defend the law against a likely legal challenge, but the financial footnote was ignored, Shurtleff said.

In fact, of six fiscal notes forwarded by the AG's office this year, only one made it onto the bill, Shurtleff said, and the legislative fiscal analyst cut the amount by 25 percent. In Utah's budget-conscious Legislature, even the most conservative fiscal notes can doom harmless bills.

John Massey, head of the Legislative Fiscal Analysts Office, said his analysts almost never attach fiscal notes for litigation. "Until a case goes to court, we just don't know" how much it will cost, Massey said, defending the practice of disregarding the AG's estimates. Usually, Massey said, there is an expectation that the attorney general will "just allocate the work load among existing staff."

That's what happened with the Child Protection Registry, which contained no fiscal note for defending the law in court, and is now being challenged by a cornucopia of porn industry, free speech and advertising advocates. The Utah law requires companies that sell adult-oriented products and services to submit their e-mail lists to Unspam to be "scrubbed" of addresses to which minors have access. The cost is half a cent for every address they submit, and Unspam gets 80 percent of the money.

Only the registry, nearly two years old, has been a financial failure. As of March, the Division of Consumer Protection had collected just $187,224 of the $3 million to $6 million that was anticipated. The state's share is a measly $37,445 - not nearly enough to cover the $58,000-a-year in prosecutorial fees and the $75,000-a-year full-time Department of Commerce investigator estimated in the original legislation. Now the costs also include up to $200,000 for an outside attorney.

Prince said he was surprised to learn a private vendor can be sued along with the state. He claims the plaintiffs named his company in hopes of putting him out of business and neutering the new law. Prince said the company paid Hatch about $70,000 before deciding it could pay no more, saying the money helped defend the state's interests as well.

"I'm happy we subsidized that cost to the extent we did," Prince said.

Hatch also argued the burden should be on the state, not Unspam, to defend the state law.

"It's like you need your engine rebuilt and all you can afford is a tuneup," said Hatch, describing the complex litigation and Unspam's inability to pay.

Shurtleff said he is happy to have Hatch's help on the case, but he did not request it. Rather, he said legislative leaders told him "this is what the Legislature wants" and agreed to supplement the AG's budget to cover the costs.

Shurtleff doesn't like to hire outside attorneys, he said, because they are expensive and have a tendency to overbill. So when lawmakers approached him about putting Hatch on the payroll, Shurleff said he insisted they cap his fees at $200,000.

The contract, signed in August, pays for Hatch, who charges $395 an hour, and an associate attorney, who gets $225 per hour, though Hatch agreed to give the state a 15 percent discount, Shurtleff said.

Still, that's three times what state attorneys make.

Shurtleff and his veteran assistants could not recall another case in which the state paid to defend a private company, let alone assume the fees of its attorney. That doesn't mean it hasn't happened, said Assistant Attorney General Jim Soper. A case could be made for defending a private company's interests when they coincide with the state's, Soper said.

"If the company was unable to defend itself and there were adverse consequences to the state, then there might be a sound, underlying reason for us to handle it," Soper said.

It's more common for vendors and contractors to indemnify the state, he said. There is some question about whether Unspam agreed to do just that.

Shurtleff and Commerce Director Francine Giani recalled a meeting in 2004 when the registry legislation was being debated in which Pat Shea, an attorney who represented Unspam at the time, pledged to" represent the state for free" in any litigation, they said.

Shea, a mentor and adviser to Unspam's Prince, said he never promised to represent the state in court, only in negotiations and discussions with critics. His legal work for Unspam was limited and mostly pro bono, Shea said, although Prince did give him options in the company should it ever go public.

Senate President John Valentine, whose recollection of the meeting included who was present and where he was sitting, said he didn't take Shea's offer seriously. "It was an off-hand remark," Valentine said, "not a written guarantee."

Valentine had more trouble remembering last summer's conversation about hiring Hatch. "I have no idea," he said. "I don't remember anything about this." House Speaker Greg Curtis also had difficulty recalling the meeting.

After conferring with his chief deputy, who kept notes of the meeting, Valentine insisted Shurtleff came to him and Curtis, saying his office did not have the expertise to handle the case. Valentine also said it was leadership's idea to cap the fees.

"At the time I was trying to protect children from pornography and be responsive to the needs of the attorney general," Valentine said. "I might think differently in hindsight."

lfantin@sltrib.com

A money pit

The Utah Child Protection Registry was expected to generate millions for the state, but instead has only produced about $37,500 for the state in two years. Now the company that sold the program as a money-maker is defending itself in court, and has persuaded the state to pay for its lawyer - at a cost of up to $200,000.