On Thursday the Kauffman Foundation will announce that it is making $10 million in initial contributions to found an initiative aimed at reinvigorating, and, to some extent redirecting, the exceedingly influential school of thought that has come to be known as “law and economics.”

The discipline uses economic analysis to try to shed light on which legal rules will most benefit society in all areas of the law, but especially in antitrust, torts, contracts, and property cases.

Kauffman’s new “Law, Innovation and Growth” initiative seeks to refocus the law-and-economics debate to center on the promotion of entrepreneurship, which has long been one of the key goals of that Foundation, which was started in 1966 by pharmaceutical magnate Ewing Marion Kauffman (who started Marion Laboratories). The Foundation, based in Kansas City, Mo., says it currently has a corpus of about $2 billion.

Though the field of law and economics has often been seen as a politically conservative movement, the leader of the Kauffman initiative will be Robert Litan, Kauffman’s vice president of research and policy. Litan has held prominent governmental positions during Democratic administrations and has been affiliated with the centrist-to-liberal Brookings Institution for nearly 20 years. Among other things, Litan was deputy assistant attorney general in the antitrust division of the Clinton Justice Department when Justice first went after Microsoft in the 1990s. (Litan has both a Ph.D. in economics and a law degree from Yale.)

“I’d characterize the law-and-economics school as a mode of economic thinking,” says Litan in an interview, contending that it is politically neutral. “There are many people in the field who are Democrats as well as Republicans, liberals rather than conservatives.”

Indeed, the field’s two most towering figures, he stresses, are positioned toward opposite ends of the political spectrum: Richard Posner, the conservative, former University of Chicago Law School professor and now Reagan-appointed, federal appeals court judge in Chicago; and Guido Calabresi, the liberal former Yale Law School professor and dean, and Clinton-appointed federal appeals court judge in New York.

In Litan’s view, the law-and-economics movement to date has focused on the issue of achieving “static efficiency” — in essence, how best to allocate the existing pie of wealth — while giving insufficient attention to dynamic efficiency, i.e., the need to ensure that the pie keeps growing. For example, a raging issue lawyers are wrestling with today, he notes, is the question of how to reform the current patent and copyright laws to ensure that they spur entrepreneurship and invention, rather than stifle them. This is the type of issue that is right smack in the new initiative’s wheelhouse.

Even before the current economic crisis, Litan says, the law-and-economics movement needed a shot of adrenaline for at least two reasons. The first was age: the school, after all, got rolling in the late 1940s at the University of Chicago. “Like all revolutions when they mature,” observes Litan, “they change. They hit sort of a wall. What’s happened to law and economics is . . . that it’s become incredibly mathematical, very niche, highly theoretical, and difficult to understand.”

Secondly, he explains, the movement has not only lost its momentum, it’s lost its funding. Since at least the early 1970s, the law-and-economics school had been able to purchase premium shelf-space in the marketplace of ideas thanks to generous funding from two (politically conservative) foundations: in its early days, the Liberty Fund, and, later, The John M. Olin Foundation. But the latter group disbanded in late 2005, having spent down its corpus in accordance with its benefactor’s direction that his bequest be entirely used up within a generation.

“So what better time for another foundation to come along,” asks Litan, to not only pick up the slack, but “to try to torque the movement away from static efficiency to growth.”

How does the current economic collapse — and its implicit lesson that over-reliance on market mechanisms have led us to disaster — affect his and Kauffman’s plans?

“Ironically,” he responds, “it may be an even bigger deal now that economy is collapsing. We are now about to have a huge national debate on the role of markets and regulation … and how much are we going to roll back from the market-oriented philosophy in which a lot of law-and-economics participated. … From our viewpoint we’re hopeful that whatever repairs we make in the economic system, we don’t kill off risk-taking and entrepreneurial drive, because that’s what we need for growth.”

The foundation’s initial $10 million investment will include a $2.8 million grant for researchers to examine the impact of law and regulation on growth at eight top law schools, including Yale, Harvard, Stanford, Columbia, Northwestern, Boston University, George Washington, and the University of Iowa. Another $2.8 million will go the Harvard’s Berkman Center for Internet and Society; and $2.2 million more to fund research by young assistant professors at law schools, to be called Kauffman Legal Research Fellows. The rest will be used to fund seminars at law schools , and to fund the new Stanford Intellectual Property Litigation Clearinghouse, which launched Monday, and is being run by professors Mark A. Lemley and Joshua Walker.

Litan’s role model here, he acknowledges, is Henry Manne, a dean emeritus at George Mason University School of Law in Arlington, Vir., who was law-and-economics’ chief proselytizer and salesman. Beginning in the early 1970s, Manne set up seminars for influential professors, followed by seminars for federal judges, followed by, eventually, law-and-economics centers at many prominent law schools, typically with backing from either the Liberty Fund or Olin Foundations.

Manne has written a very engaging history of this missionary work, entitled “How Law and Economics was Marketed in a Hostile World: A Very Personal History.” In it, Manne notes that in the early 1970s, when he was first trying to attract top law professors to a summer program in economics he was launching, “we paid everyone the then princely sum of $1000, plus all expenses and some very fancy meals.”

Now there’s some economics we can all understand.

[Correction: The original version of this post inadvertently omitted to mention Northwestern University Law School from the list of schools where researchers will be receiving Kauffman grants. Regret the error.]

On Tuesday a consortium of technology companies, including IBM (IBM), will launch a new initiative designed to help shield the open-source software community from threats posed by companies or individuals holding dubious software patents and seeking payment for alleged infringements by open-source software products.

The most novel feature of the new program, to be known as Linux Defenders, will be its call to independent open-source software developers all over the world to start submitting their new software inventions to Linux Defenders (Web site due to be operational Tuesday) so that the group’s attorneys and engineers can, for no charge, help shape, structure, and document the invention in the form of a “defensive publication.”

Linux Defenders will then also see to it that the publication, duly attributing authorship of the invention to the developer who submitted it, is filed on the IP.com Web site, a database used by the U.S. Patent and Trademark Office and other patent examiners throughout the world when they are trying to determine whether a proposed patent is truly novel, as any patentable invention is supposed to be.

In effect, the defensive-publications initiative mounts a preemptive attack upon those who would try to patent purported software inventions that are not truly novel — i.e., innovations that are already known and in use, though no one may have ever previously bothered to document them, let alone obtain a patent on them, a process usually requiring the hiring of attorneys as well as payment of significant filing fees.

“The idea is to create a defensive patent shield or no-fly zone around Linux,” says Keith Bergelt, the chief executive officer of Open Invention Network, the consortium launching the site. The core members of that group, formed in 2005, are IBM, NEC, Novell (NOVL), Philips, Red Hat (RHT) and Sony.

OIN’s Linux Defender program is being co-sponsored by two of the most prominent guardians of the free- and open-source software community, the Linux Foundation in San Francisco and the Software Freedom Law Center in New York. In addition, the site is being hosted and “co-developed” by New York Law School, which has, since June 2007, been sponsoring, in coordination with the U.S. Patent and Trademark Office, its own well-received, complementary project, known as the Peer to Patent Community Patent Review site. That site solicits assistance from the open-source community to produce evidence that an invention for which a patent is currently being sought was actually already known or in use prior to the patent applicant’s filing.

So-called free- and open-source software is software that, by its licensing terms, confers certain “freedoms” upon users that are usually forbidden by conventional proprietary software companies, like Microsoft. These freedoms include the right to see the software’s source code, alter it, copy it, and redistribute it. The best known open-source product is Linux, or GNU/Linux, a complete open-source operating system that has become quite popular among Fortune 500 corporations for use on their data-center servers. Patents threaten the whole free-and-open-source eco-system, however, in that none of the key open-source freedoms can be practiced if an outsider can establish that a given piece of software infringes a valid patent he holds.

The Linux Defenders program is largely the brainchild of Bergelt, who took over as Open Invention Network’s CEO this past February. The program also reflects a new, more proactive role Bergelt envisions for OIN than the group has played in the past.

Until now, OIN’s purpose has been one-dimensional: to acquire a defensive portfolio of strategically crucial patents, which OIN makes available, royalty free, to any company that reciprocally agrees not to assert any of its own patents against the Linux community. (About 50 companies have already entered into such formal agreements with OIN, of which the best known are probably Google (GOOG) and Oracle (ORCL).) The implicit threat is that if any outsider — a Microsoft, (MSFT) say, which declared publicly in May 2007 that open-source software then violated 235 of its patents — were to ever bring a patent suit against a player in the Linux community, that outsider would, in turn, risk countersuit by OIN or its member companies asserting infringement of their own patents by the outsider.

While this IP-acquisition program remains a central one for OIN, Bergelt says, OIN will also now seek to “think more creatively” about other ways to protect and foster Linux’s development by means of “relationship-building” and “information-sharing,” including efforts to explain the importance of open-source and open-platform approaches to the media, patent officials, and competition authorities, among others.

Befitting someone who plans to tackle this ambitious range of goals, Bergelt has a background that is more diverse than that of his intellectual-property lawyer predecessor, Jerry Rosenthal, who, prior to heading OIN, had served as IBM’s IP-licensing chief. Though Bergelt is also an IP lawyer, he is, in addition, an entrepreneur and diplomat. Immediately prior to joining OIN, Bergelt was the president and CEO of the intellectual-property focused hedge fund Paradox Capital. Before that, he was a senior advisor to private-equity fund Texas Pacific Group (now TPG); headed the strategic intellectual asset management unit at Motorola; and co-founded the strategic intellectual asset management unit within the electronics and telecommunications group at SRI Consulting in Menlo Park. Earlier still in his career, he spent 12 years as a U.S. foreign service officer, including a posting to the U.S. Embassy in Tokyo, where he negotiated IP rights agreements with certain Asian countries, including China.

The Linux Defenders program will actually have three components. The first will be a peer-to-patent component that, like New York Law School’s existing program, will reach out to the open-source community in search of evidence of “prior art” — proof of preexisting knowledge or use of certain inventions — that can be used to challenge applications for patents that have been filed but not yet granted. The goal here is to persuade patent examiners not to grant the patent being sought because the invention is not truly novel.

The second component will be a natural extension of the first, to be known as “Post-Grant Peer to Patent,” which will enlist similar community assistance in the search for prior art relevant to patents that have already actually issued. In this case, the goal would be — assuming such prior art is found — to initiate an administrative reexamination proceeding before the U.S. PTO to get the patent invalidated. (There have been some earlier post-grant, peer-to-patent efforts — sometimes referred to as peer-to-issue programs — by both nonprofits and private companies, but none with the commitment, and on the scale, that OIN envisions, Bergelt says.)

The third component is the defensive-publications initiative. The phenomenon of defensive publication is also not new, Bergelt acknowledges, although it has primarily been used in the past by private companies protecting proprietary business models. Since at least the 1970s, he says, when the filing of an important patent by one company would often spur rivals to respond by seeking inter-related patents designed to restrict the usefulness of the first company’s filing, proprietary companies began using defensive publication to beef up and buffer their core patents.

“They’d file one patent,” Bergelt explains, “and then the next day they’d file thirty defensive publications that would protect all of the extensions of it they could think of, so the core patent was fenced off by layers of barbed wire, if you will. . . . What I’ve done is turn that idea on its head a little bit.” (Defensive publications are cheaper and easier to prepare than full-fledged patent-applications.)

Although some factions of the free- and open-source community are ideologically opposed to the whole notion of software patents — most notably and passionately Richard Stallman, the founder of the Free Software Foundation (which is a client of Linux-Defenders co-sponsor Software Freedom Law Center, which, in turn,  supports the End Software Patents organization) — neither Bergelt nor OIN fall into that camp.

“We’re not anti-patent by any stretch of the imagination,” says Bergelt. “More patents is fine with me, as long as they’re high quality. Quality is the drum we beat.”

In fact, Bergelt says, if a developer wants to get an actual patent on his invention, and then put defensive publications around it, Linux Defenders will help him do so — so long as the developer will ultimately be contributing the patent to the Linux community.

The U.S. Court of Appeals for the Federal Circuit’s blockbuster patent ruling Thursday in the In re Bilski case obviously has important repercussions for the future of software patents, a subject I wrote about in the post entitled, “Ending software patents: Has the time come?“

Since I am under a difficult deadline on an unrelated matter, I can’t yet tackle this subject myself, but I did want to refer readers to a couple remarkable postings from a pro-software patent attorney who takes the position that Bilski amounts to a complete rejection of the whole notion of software patents – a position that, if true, would have enormous repercussions for companies like Microsoft (MSFT), which has invested millions to compile vast arsenals of them, as well as the patent-threatened Linux community, and its promoters like Novell (NOVL) and Red Hat (RHT). The poster, Gene Quinn, is a New Hampshire patent attorney at White & Quinn, and a contributing editor to the PLI’s (Practicing Law Institute’s) Patent Brief Web site, where these posts appear.

I haven’t read Bilski yet, so I’m not vouching in any way for the cogency of Quinn’s interpretation, but I just wanted to let readers see the posts, assess them, and express comments. For a quick summary of Bilski and why it’s important, here’s the Wall Street Journal Law Blog’s discussion. Here’s Quinn’s first post, entitled Federal Circuit Decides Software No Longer Patentable, and here’s the second, entitled “State Street Overruled … PERIOD.”

Yahoo’s ad alliance with Google seems like a great deal to Messrs. Brin, Page, and Yang. Now they just have to win over the Justice Department.

Google and Yahoo had hoped to have it all up and running by now. As you may recall, the two Internet giants announced an alliance last June in which Google would supply Yahoo with search ads to supplement Yahoo’s own. Google would get a big new customer for its ad-delivery service, while Yahoo would get a new source of revenue – and best of all, they’d keep Microsoft from swallowing Yahoo.

Then Washington got in the way. Due to pushback from antitrust regulators, in early October, Google (GOOG) and Yahoo (YHOO) put off the launch to give the Justice Department more time to chew on it. In September, Justice reportedly hired veteran antitrust litigator (and former Walt Disney vice chairman) Sandy Litvack to help review the deal, and soon thereafter Canadian authorities hired an outside lawyer too. The European Union is also taking a hard look.

What’s the hang-up? Well, there are three basic concerns about just what this alliance really amounts to. First, if it had been a merger between Google, with 70% share in the paid-search market, and Yahoo, with the next 20%, it would clearly violate antitrust laws by creating a monopoly. (Paid-search ads are the ones that show up near the top of a search-result screen or off to the side, under the rubric “sponsored links.”) Second, if Google were paying Yahoo to exit the paid-search arena, that would be an illegal agreement between competitors to allocate markets. Third, if Google and Yahoo were agreeing to set a price floor for the two companies’ paid-search offerings, that would be illegal price-fixing.

The actual deal being proposed looks something like a slow-motion version of the first two scenarios, and it might constitute an immediate realization of the third.

Google and Yahoo have tried to placate skeptics with a raft of reassurances: They’re not merging; Yahoo will continue to compete in paid searches; ad prices will continue to be set by auction, with each company’s auctions operating independently; Yahoo will only run Google ads to the extent it chooses; and Yahoo is still free to display ads from other paid-search providers, including third-place Microsoft (MSFT).

Not everyone is convinced, though – notably advertisers. The Association of National Advertisers (ANA), the Association of Canadian Advertisers, and the World Federation of Advertisers have all written regulators to voice opposition. In the letter from the ANA – a 375-company association with a board that includes members from Wal-Mart, Sears, and McDonald’s – CEO Bob Liodice writes that his group “is aware of only one advertiser/marketer that does not object to the Google-Yahoo collaboration.” (Liodice wouldn’t identify the exception.)

MICROSOFT GETS SUSPICIOUS

One big problem for Yahoo may be an astounding comment allegedly made by its own CEO, Jerry Yang, during negotiations with Microsoft in a San Jose airplane hangar on June 8, just three days before the Google-Yahoo pact was unveiled. (Google offered Yahoo the ad deal in an apparent effort to keep it out of the hands of Microsoft, which had offered to buy Yahoo at a 75% stock premium.)

According to testimony that Microsoft general counsel Brad Smith later gave to the Senate Judiciary Committee, Yang peered across a conference table and said, “Look, the search market today is basically a bipolar market…. On one pole, there’s Google, and on the other pole, there are Yahoo and Microsoft…. If we do this deal with Google, Yahoo will become part of Google’s pole.” Smith and his Microsoft colleagues were dumbstruck. Smith testified that during a break a few minutes after Yang’s comment, Microsoft CEO Steve Ballmer cracked, “[Yang] said there’s only going to be one pole in the market. I guess that would be a ‘mono-pole,’ wouldn’t it?”

When stunned Senators demanded that Yahoo general counsel Michael Callahan, who had also been present at the June 8 meeting, give his account of what Yang had said, Callahan repeatedly refused until, when pressed, he finally said, “I don’t recall that comment.”

Even putting aside the disputed remark, there are plenty of reasons to be skeptical about those reassurances from Yahoo and Google. For example, consider Yahoo’s claim that the deal will enable it to compete harder in the search business. The company has told shareholders that it hopes to make $800 million a year from its pact with Google – money that, as Yahoo president Sue Decker has written on a company blog, will be plowed back into R&D “to help us become a stronger competitor in all aspects of online advertising,” including paid searches. Yahoo has an incentive to do so, the company says, because it keeps all the revenue from its own ads but only a portion from Google’s.

Hmm. What portion will Yahoo keep when it uses a Google ad? That’s not public. But according to a lawyer close to the Google-Yahoo camp, Google’s ad deals with web publishers large and small-from the New York Times website to GPSworld.com -typically leave the publisher with “the lion’s share” of the revenue. Accordingly, when Yahoo runs an ad delivered by Google, we’re probably not talking about a 50-50 split; it’s more like 90-10, with 90% staying with Yahoo. So if Yahoo can make 90% of what Google’s superior mousetrap currently yields while incurring no research expenditures, how great is its incentive to keep dumping hundreds of millions into R&D for its own clunkier mousetrap? Plus, if Google really thought the deal would help Yahoo build a more competitive paid-search program, would Google be doing the deal? Concern about the deal’s sapping Yahoo’s long-term incentive to compete is presumably a key factor spurring EU regulators to nose around, notwithstanding its ostensible geographical limitation to the U.S. and Canada.

THE PRICE PROBLEM

Then there’s the price-fixing issue. Nobody’s price fixing, Google and Yahoo insist, because ad prices will continue to be set by separate auctions. That’s true. But part of the idea with this alliance is to replace some Yahoo ads on Yahoo search screens with Google ads, when the Google ads will fetch more revenue. Here is an oversimplified hypothetical example: Suppose you’re an auto parts dealer trying to drum up some business with search ads. You bid for the query “spark plugs Dallas Texas” on both the Yahoo auction and the Google auction-and learn that the going rates on Yahoo and Google, respectively, are $0.80 per click and $1.20 per click. Google reaches more users – hence the higher bids – but you decide to go for the $0.80 ad on Yahoo.

Guess what? You’ll need to pay the $1.20 anyway. Why? Remember that with the Google alliance, Yahoo now has the choice of going with ads delivered through its own system or through Google’s. Yahoo, of course, is going to run the ad that makes the most money – the ad from Google. In fact, Yahoo would never run its own ads if they were priced more cheaply than an available, comparable Google ad. In that sense the Google ad prices, though set by auction, would effectively set a floor for the prices of comparable ads displayed on Yahoo. Price floors constitute illegal price fixing.

Yahoo and Google respond that Yahoo won’t have the real-time pricing information about Google’s ads it would need to make instantaneous price comparisons to Yahoo ads. Still, Yahoo obviously thinks it has some way to compare the relative prices of Google and Yahoo ads – how else will it know when to replace a Yahoo ad with a Google ad?

Which is not to say that the search giants’ formidable teams of lawyers won’t eventually win Justice’s blessing for the deal. Clearly, though, those lawyers still have some serious work to do.

[CLARIFICATION: A spokesperson for Yahoo says that the way I've described the "$800 million" annual revenue figure above is inaccurate. To be clear, what Yahoo said in its announcement and SEC filing was this: "Yahoo! believes that this agreement will enable the Company to better monetize Yahoo!'s search inventory in the United States and Canada. At current monetization rates, this is an approximately $800 million annual revenue opportunity. In the first 12 months following implementation, Yahoo! expects the agreement to generate an estimated $250 million to $450 million in incremental operating cash flow." What Yahoo president Sue Decker said during the June 12 teleconference call was this: "In the first 12 months following implementation, we expect this agreement to generate $250 million to $450 million in incremental operating cash flow. Over the longer term, Yahoo! believes this agreement enables the company to better monetize Yahoo!'s search inventory. At the current monetization rate, we believe there is an approximate $800 million in annual revenue opportunity in the U.S. and Canada on those queries where monetization upside exists. This revenue opportunity could be achieved either from this arrangement with Google, which includes both search and nonsearch elements, or from other enhancements to our search capability, or a combination of them." -- RHP]

Yahoo’s ad alliance with Google seems like a great deal to Messrs. Brin, Page, and Yang. Now they just have to win over the Justice Department.

Google and Yahoo had hoped to have it all up and running by now. As you may recall, the two Internet giants announced an alliance last June in which Google would supply Yahoo with search ads to supplement Yahoo’s own. Google would get a big new customer for its ad-delivery service, while Yahoo would get a new source of revenue – and best of all, they’d keep Microsoft from swallowing Yahoo.

Then Washington got in the way. Due to pushback from antitrust regulators, in early October, Google (GOOG) and Yahoo (YHOO) put off the launch to give the Justice Department more time to chew on it. In September, Justice reportedly hired veteran antitrust litigator (and former Walt Disney vice chairman) Sandy Litvack to help review the deal, and soon thereafter Canadian authorities hired an outside lawyer too. The European Union is also taking a hard look.

What’s the hang-up? Well, there are three basic concerns about just what this alliance really amounts to. First, if it had been a merger between Google, with 70% share in the paid-search market, and Yahoo, with the next 20%, it would clearly violate antitrust laws by creating a monopoly. (Paid-search ads are the ones that show up near the top of a search-result screen or off to the side, under the rubric “sponsored links.”) Second, if Google were paying Yahoo to exit the paid-search arena, that would be an illegal agreement between competitors to allocate markets. Third, if Google and Yahoo were agreeing to set a price floor for the two companies’ paid-search offerings, that would be illegal price-fixing.

The actual deal being proposed looks something like a slow-motion version of the first two scenarios, and it might constitute an immediate realization of the third.

Google and Yahoo have tried to placate skeptics with a raft of reassurances: They’re not merging; Yahoo will continue to compete in paid searches; ad prices will continue to be set by auction, with each company’s auctions operating independently; Yahoo will only run Google ads to the extent it chooses; and Yahoo is still free to display ads from other paid-search providers, including third-place Microsoft (MSFT).

Not everyone is convinced, though – notably advertisers. The Association of National Advertisers (ANA), the Association of Canadian Advertisers, and the World Federation of Advertisers have all written regulators to voice opposition. In the letter from the ANA – a 375-company association with a board that includes members from Wal-Mart, Sears, and McDonald’s – CEO Bob Liodice writes that his group “is aware of only one advertiser/marketer that does not object to the Google-Yahoo collaboration.” (Liodice wouldn’t identify the exception.)

MICROSOFT GETS SUSPICIOUS

One big problem for Yahoo may be an astounding comment allegedly made by its own CEO, Jerry Yang, during negotiations with Microsoft in a San Jose airplane hangar on June 8, just three days before the Google-Yahoo pact was unveiled. (Google offered Yahoo the ad deal in an apparent effort to keep it out of the hands of Microsoft, which had offered to buy Yahoo at a 75% stock premium.)

According to testimony that Microsoft general counsel Brad Smith later gave to the Senate Judiciary Committee, Yang peered across a conference table and said, “Look, the search market today is basically a bipolar market…. On one pole, there’s Google, and on the other pole, there are Yahoo and Microsoft…. If we do this deal with Google, Yahoo will become part of Google’s pole.” Smith and his Microsoft colleagues were dumbstruck. Smith testified that during a break a few minutes after Yang’s comment, Microsoft CEO Steve Ballmer cracked, “[Yang] said there’s only going to be one pole in the market. I guess that would be a ‘mono-pole,’ wouldn’t it?”

When stunned Senators demanded that Yahoo general counsel Michael Callahan, who had also been present at the June 8 meeting, give his account of what Yang had said, Callahan repeatedly refused until, when pressed, he finally said, “I don’t recall that comment.”

Even putting aside the disputed remark, there are plenty of reasons to be skeptical about those reassurances from Yahoo and Google. For example, consider Yahoo’s claim that the deal will enable it to compete harder in the search business. The company has told shareholders that it hopes to make $800 million a year from its pact with Google – money that, as Yahoo president Sue Decker has written on a company blog, will be plowed back into R&D “to help us become a stronger competitor in all aspects of online advertising,” including paid searches. Yahoo has an incentive to do so, the company says, because it keeps all the revenue from its own ads but only a portion from Google’s.

Hmm. What portion will Yahoo keep when it uses a Google ad? That’s not public. But according to a lawyer close to the Google-Yahoo camp, Google’s ad deals with web publishers large and small-from the New York Times website to GPSworld.com -typically leave the publisher with “the lion’s share” of the revenue. Accordingly, when Yahoo runs an ad delivered by Google, we’re probably not talking about a 50-50 split; it’s more like 90-10, with 90% staying with Yahoo. So if Yahoo can make 90% of what Google’s superior mousetrap currently yields while incurring no research expenditures, how great is its incentive to keep dumping hundreds of millions into R&D for its own clunkier mousetrap? Plus, if Google really thought the deal would help Yahoo build a more competitive paid-search program, would Google be doing the deal? Concern about the deal’s sapping Yahoo’s long-term incentive to compete is presumably a key factor spurring EU regulators to nose around, notwithstanding its ostensible geographical limitation to the U.S. and Canada.

THE PRICE PROBLEM

Then there’s the price-fixing issue. Nobody’s price fixing, Google and Yahoo insist, because ad prices will continue to be set by separate auctions. That’s true. But part of the idea with this alliance is to replace some Yahoo ads on Yahoo search screens with Google ads, when the Google ads will fetch more revenue. Here is an oversimplified hypothetical example: Suppose you’re an auto parts dealer trying to drum up some business with search ads. You bid for the query “spark plugs Dallas Texas” on both the Yahoo auction and the Google auction-and learn that the going rates on Yahoo and Google, respectively, are $0.80 per click and $1.20 per click. Google reaches more users – hence the higher bids – but you decide to go for the $0.80 ad on Yahoo.

Guess what? You’ll need to pay the $1.20 anyway. Why? Remember that with the Google alliance, Yahoo now has the choice of going with ads delivered through its own system or through Google’s. Yahoo, of course, is going to run the ad that makes the most money – the ad from Google. In fact, Yahoo would never run its own ads if they were priced more cheaply than an available, comparable Google ad. In that sense the Google ad prices, though set by auction, would effectively set a floor for the prices of comparable ads displayed on Yahoo. Price floors constitute illegal price fixing.

Yahoo and Google respond that Yahoo won’t have the real-time pricing information about Google’s ads it would need to make instantaneous price comparisons to Yahoo ads. Still, Yahoo obviously thinks it has some way to compare the relative prices of Google and Yahoo ads – how else will it know when to replace a Yahoo ad with a Google ad?

Which is not to say that the search giants’ formidable teams of lawyers won’t eventually win Justice’s blessing for the deal. Clearly, though, those lawyers still have some serious work to do.

[CLARIFICATION: A spokesperson for Yahoo says that the way I've described the "$800 million" annual revenue figure above is inaccurate. To be clear, what Yahoo said in its announcement and SEC filing was this: "Yahoo! believes that this agreement will enable the Company to better monetize Yahoo!'s search inventory in the United States and Canada. At current monetization rates, this is an approximately $800 million annual revenue opportunity. In the first 12 months following implementation, Yahoo! expects the agreement to generate an estimated $250 million to $450 million in incremental operating cash flow." What Yahoo president Sue Decker said during the June 12 teleconference call was this: "In the first 12 months following implementation, we expect this agreement to generate $250 million to $450 million in incremental operating cash flow. Over the longer term, Yahoo! believes this agreement enables the company to better monetize Yahoo!'s search inventory. At the current monetization rate, we believe there is an approximate $800 million in annual revenue opportunity in the U.S. and Canada on those queries where monetization upside exists. This revenue opportunity could be achieved either from this arrangement with Google, which includes both search and nonsearch elements, or from other enhancements to our search capability, or a combination of them." -- RHP]

Russia’s $22.5 billion case against the Bank of New York Mellon now appears to hinge upon a stray misstatement contained in a continuing legal education outline written by a lawyer who’s never been involved in the case, and who was simply repeating a misstatement contained in a government press release that was later amended to delete the misstatement due to its inaccuracy.

This takes a little while to explain, but I really think it’s worth the trouble. I’ve never seen anything quite like it.

Last week, I explained here that Manhattan federal prosecutors seemed to have blown a massive hole in the Russian Federal Customs Service’s exceedingly unusual $22.5 billion civil RICO case against the Bank of New York Mellon (BK), a case that, notwithstanding its purported reliance on U.S. law, Russia has chosen to file in a commercial court in Moscow, known as an arbitrazh court.

As explained in that earlier post, Russia’s lead lawyer, a Miami-based airplane-crash lawyer named Steven C. Marks of Podhurst Orseck, has predicated his case in large part on the premise that when Bank of New York entered into a non-prosecution agreement in Nov. 2005, it admitted criminal responsibility for the actions of rogue vice president Lucy Edwards in the late 1990s. Edwards pled guilty in 2000 to having helped Russian citizens illegally wire transfer their money out of that country via Bank of New York accounts.

This July, however, the federal prosecutors office that had investigated the bank refuted Marks’ claim, explaining that the bank had never admitted “criminal culpability.” (The clarification came in this letter, which I published last week.)

Although nothing in the nonprosecution agreement itself had ever said that the bank admitted criminal responsibility for Edwards’ conduct, a poorly-written government press release that accompanied the nonprosecution agreement did leave that misimpression, stating that the bank had “admitted its criminal conduct.” It did so in part because it was actually reporting the resolution of two unrelated probes tied to different Bank of New York branches. In the view of the prosecutors, the bank was, in fact, admitting criminal responsibility for certain wrongdoing at a branch on Long Island (which had nothing to do with Russia), but not for what Lucy Edwards had done, which related to a branch in Manhattan.)

In August of this year, federal prosecutors further tried to clarify the situation by issuing an amended version of the original press release, deleting from it the language about the bank having “admitted its criminal conduct” that Marks had repeatedly quoted in statements to the press, bank stock analysts, and the court. The amended release also made clear that certain other language in the release — including language quoted by Russia’s retained expert Alan Dershowitz in his affidavit in the case — actually related to the Long Island probe, not the Lucy Edwards matter. I described that situation in this feature story for the Sept, 29 issue of Fortune. (As reported there, Dershowitz never responded to my inquiries about the apparent mistake, and Marks’s comment was cryptic and hard to characterize; you can read it for yourself there.)

On Monday of this week, at the resumption of a pretrial hearing in the case, two of the bank’s key experts testified. One of them, former U.S. attorney general Richard Thornburgh, addressed the meaning of the nonprosecution agreement, the government press release, the press release’s amendment, and the July letter from the Manhattan U.S. Attorney’s Office stating that the bank had never admitted criminal culpability in connection with Edwards’ conduct. Thornburgh, now a partner at the K&L Gates law firm, testified that the bank had never been charged with criminal conduct, let alone admitted any.

If Russia had wanted to cross-examine Thornburgh, it could have, of course. Instead, to the amazement of the bank’s lawyers, Russia sent no representatives at all to the long-scheduled hearing, as I reported here. Instead, its lawyers simply sent a fax to the judge that morning asking for an adjournment, explaining that all of its lawyers were too busy to attend. Though Marks was checked in at his Moscow hotel, according to what a hotel receptionist told me, and had apparently flown to Russia solely to attend that hearing, he didn’t show up. The judge rejected the faxed request and took testimony anyway — it was, after all, the third time Thornburgh and the other expert, Greg Joseph, had made the trip to Russia hoping to testify. At the end of the day the judge adjourned the hearing until Nov. 13.

Marks never returned a Monday voicemail or email seeking comment about why none of Russia’s lawyers attended, and Russia’s public relations firm, the Miami office of Burson Marsteller, has not yet responded to the same question, which I posed to it yesterday at about 12:30 pm.

What Burson Marsteller did do yesterday, however, was issue this statement, which does not explain or even allude to the fact that its client failed to show up. The statement also does not explain or even allude to the recently revealed July letter from the Manhattan prosecutors office — denying that the bank ever admitted criminal culpability — that, as I’ve said, seems to blow a massive hole in its case. Instead, Burson Marsteller’s statement reveals how Russia purportedly would cross-examine Thornburgh in the event that the bank agrees to schlep him back to Russia at some time in the future (and assuming, of course, that Russia’s lawyers aren’t still too busy with other matters to attend).

Here’s how Russia purportedly would undermine Thornburgh’s credibility, according to Burson Marsteller: “He and/or his firm stated the following in an article written with his assistance: ‘the Non-Prosecution Agreement relates to BNY’s responsibility for crimes involving fraud and money laundering, as well as BNY’s failure to comply with mandatory reporting obligations… As part of the non-prosecution agreement, BNY agreed to… admit to its criminal conduct.’”

I was familiar with the “article” Burson Marsteller was referring to, since Marks had cited it prominently in a document called “Case Summary for the Press,” which he sent to me when I first started looking into the case. (The article was highlighted in paragraph two of Marks’s five-page press document; paragraph one had been devoted to the subsequently deleted language from the government press release.)

In conversations with me, Marks usually referred to this document as “the Thornburgh memo,” and the digital file he sent me of it was labeled “Thornb article.” All it really is, however, is this Continuing Legal Education document, written by Barry Hartman, who, like Thornburgh, is a partner at K&L Gates, which is a firm of 1,235 lawyers and 243 partners, according to The American Lawyer. (Hartman declined to comment for this story. Suffice it to say that I am aware of no public record anywhere suggesting that Hartman has ever personally represented the Bank of New York in any matter whatsoever. A different law firm entirely, Sullivan & Cromwell, represented the bank in connection with its non-prosecution agreement in 2005.)

In the section of Hartman’s presentation relating to non-prosecution agreements, he lists 12 examples, including the Bank of New York’s, and gives a short, blurb-like summary of each. Footnotes explain the sources of Hartman’s information. For the Bank of New York entry (see page 15) Hartman’s footnote (footnote 24) lists his sole source of information as — you guessed it — the government’s Nov, 8, 2005 press release that was, in August of this year, amended to delete the language that Russia and Burson Marsteller are still trying to draw our attention to.

That leaves one final question. Why do Russia, Burson Marsteller, and Marks think that Thornburgh had anything to do with Hartman’s CLE outline? I asked Marks that question some weeks back, and he drew my attention to footnote 1 of the document (page 2) in which Hartman acknowledges that he’s made use of a CLE outline Thornburgh wrote on the subject of internal corporate investigations. What’s that got to do with anything? Probably nothing at all, since, as is apparent from the title page, Hartman’s talk had two parts: part one was about internal corporate investigations, and part two was about nonprosecution agreements. Thornburgh’s outline was pertinent to part one.

But Marks saw it differently when he emailed me on Sept. 2: “Presumably, before his partner put his name on the article, he showed it to him and Mr. Thornburgh explicitly or at least implicitly agreed to the contents. For all we know, his important contribution concerned that very section,” Marks wrote, referring to the part about the Bank of New York’s nonprosecution agreement, whose source had been explicitly identified as the government’s later corrected press release.

Is this the stuff that $22.5 billion lawsuits are made of?

Since a number of people have emailed me seeking English translations of the various international rulings relating to whether eBay (or other online auction houses, of course) can be held liable when visitors sell counterfeit goods on its site, I thought I’d collect and post all the translations I have in one location. They might be easier to find this way using a search engine. If and when I obtain more, I’ll add them. (I’m not bothering with accents and the like because they’re a hassle to produce and also sometimes foil searches when the query doesn’t include them.)

BELGIUM
July 31, 2008: Lancome Parfums et Beaute (L’Oreal) v. eBay in the Commercial Court in Brussels (Tribunal de commerce de Bruxelles)
Lancome (L’Oreal) in English
Lancome (L’Oreal) in French

FRANCE:
June 4, 2008: Hermes v. eBay in the Troyes Court of First Instance (Tribunal de grande instance de Troyes)
Hermes ruling in English (This file also includes English translations of all the LVMH rulings)
Hermes ruling in French or French link

June 30, 2008: The three LVMH rulings in the Commercial Court of Paris (Tribunal de commerce de Paris):
1. SA Louis Vuitton Malletier v. eBay
Louis Vuitton Malletier in English
Louis Vuitton Malletier in French
2. Christian Dior Couture v. eBay
Christian Dior Couture in English
Christian Dior Couture in French (link)
3. SA Parfums Christian Dior v. eBay
Parfums Christian Dior in English
Parfums Christian Dior in French (link)

July 11: stay denied in Parfums Christian Dior (Guerlain) appeals by Court of Appeal of Paris (Cour d’appel de Paris)
[sorry, no English translation yet]
French link

GERMANY
April 30, 2008: ricardo.de v Rolex in the Federal Court of Justice
Rolex in English
[ricardo.de is not eBay, of course; it's a different online auction house. eBay itself was also sued by Rolex, with a ruling against eBay in April 2007 having been controlled, I'm told, by the earlier rulings in the ricardo.de case. I don't have an English translation of the actual eBay case. The German language Rolex v eBay ruling is here.]

UNITED STATES (for convenience and completeness)
July 14, 2008: Tiffany Inc. v eBay in the U.S. District Court, SDNY
Tiffany v eBay

A weird case got weirder this morning, when the Russian Federal Customs Service failed to send any representative at all to appear in a Moscow court for the resumption of pretrial hearings in its $22.5 billion suit against the Bank of New York Mellon (BK), according to a lawyer for the bank.

According to Damien J. Marshall, a Boies Schiller & Flexner partner representing the bank at the hearing, Judge Lyodmila Pulova explained that the customs service had faxed her a petition this morning requesting a delay until Oct. 15, and explaining only that the the service’s lawyers were busy with other matters.

Overruling Russia’s request, the judge agreed to hear testimony anyway from two of the bank’s U.S. experts — including former attorney general Richard Thornburgh — who had traveled to Russia just for the hearing, according to Marshall. When the witnesses had finished (with no cross-examination, obviously), Judge Pulova put off continuation of the hearing until Nov. 13.

An email and voicemail message for Steven C. Marks of Miami’s Podhurst Orseck, the lead lawyer for Russia in the case, were not immediately returned. The voicemail was left at Marks’s Moscow hotel. (The receptionist confirmed that Marks had checked in.)

The suit stems from the conduct of a rogue Bank of New York vice president who pleaded guilty in February 2000 to having helped depositors of a Russian bank smuggle about $7.5 billion out of Russia from 1996 to 1999 through Bank of New York accounts. The bank was never charged in connection with the case, but did enter into a non-prosecution agreement on Nov. 8, 2005, in which it agreed to pay a $14 million fine, acknowledged various regulatory lapses, and accepted “responsibility” for what had happened.

The suit is unusual in that Russia has brought it under the American civil RICO statute, but has filed it in one of its own commercial courts, known as the Arbitrazh Court for the City of Moscow. There is substantial question among experts on the Russian legal system as to whether a Russian arbitrazh court has the judicial independence necessary to rule against the Russian government in a high-stakes case.

Here is a feature story I wrote about the case for Fortune’s Sept. 29 issue.

The issue at the pretrial hearings is whether the arbitrazh court — which, as a commercial court, has no jurisdiction to interpret criminal laws (even Russian criminal laws) — can adjudicate a civil RICO case, where liability of the bank hinges upon the court finding that it has violated U.S. criminal laws.

Russia had hoped to argue that the bank had already admitted criminal liability by entering into the nonprosecution agreement, and that, therefore, the Russian court would not have to interpret any criminal laws. However, in recent weeks, as explained in this update last week, the Manhattan prosecutors who investigated the bank have disputed Russia’s claim, stating in a letter that the bank never admitted “criminal culpability.”

At today’s hearing, RICO expert Gregory Joseph presented an 80-slide PowerPoint presentation to the court, explaining why he believes that the court’s task would inevitably require it to interpret U.S. criminal laws. His testimony was followed by that of former attorney general Thornburgh, who discussed the meaning of the non-prosecution agreement and the Manhattan prosecutors’ recent letter of clarification, and said that the bank had never been charged with, let alone admitted, criminal wrongdoing.

In a phone interview, the bank’s lead counsel, Jonathan Schiller of Boies Schiller & Flexner, acknowledges that he does not know the meaning of today’s events, but says they might reflect Russia’s “reconsideration of the claim and thoughtful review . . . of whether to proceed with the case. . . . The evidence presented today established the false and inaccurate assertions by the plaintiff’s U.S. attorney at the heart of the case, and made clear that the Bank of New York did not admit or engage in criminal wrongdoing as the plaintiff’s lawyer has represented in court.”

Notwithstanding frequent assertions to the contrary by lawyers representing Russia in that nation’s $22.5 billion lawsuit against the Bank of New York Mellon (BK), the bank has never admitted “criminal culpability” for a rogue employee’s criminal wire-transfer scheme in the late 1990s, according to a letter recently written to the bank by the federal prosecutor’s office that investigated the bank.

The U.S. Attorney’s Office for the Southern District of New York (in Manhattan) — which investigated the scheme from 1999 until 2006 — made the statement in this letter, dated July 29, which Fortune obtained Tuesday.

The clarification was prompted by the highly unusual case that the Russian Federal Customs Service filed against the Bank of New York Mellon in May 2007. Though the suit is being brought under America’s civil RICO statute — the Racketeer Influenced and Corrupt Organizations Act of 1970 — Russia filed the case in one of its own commercial courts, known as the Arbitrazh Court for the City of Moscow. It appears to be one of the first times anyone has ever filed a RICO suit in a court outside the United States.

As I wrote in this feature story about the case in the Sept. 29 issue of Fortune, there is considerable doubt among experts on the Russian legal system about whether such courts have the judicial independence needed to rule impartially in a high-stakes case in which the Russian government is a litigant.

The suit stems from the conduct of Lucy Edwards, who had been a Bank of New York vice president — one of about 1,700 at that time — when she was terminated in August 1999. Edwards and her husband, Peter Berlin, pleaded guilty in February 2000 to having helped depositors of a Russian bank smuggle about $7.5 billion out of Russia from 1996 to 1999 through accounts Berlin had opened, with Edwards’ assistance, in a Bank of New York branch in Manhattan. The bank was never charged in connection with the case, but did enter into a non-prosecution agreement on Nov. 8, 2005, in which it agreed to pay a $14 million fine, acknowledged various regulatory lapses, and accepted “responsibility” for what had happened.

In that story I reported that federal prosecutors had, in August of this year, issued an amended press release to replace the one that had originally announced the bank’s entry into the non-prosecution agreement. The original press release had, among other things, stated that the bank, by entering into the agreement, “has admitted its criminal conduct.” Steven C. Marks of Miami’s Podhurst Orseck, the plaintiffs lawyer who is acting as Russia’s lead lawyer in the case, has frequently cited the release as proving that the bank has admitted criminal culpability. For instance, at a teleconference he set up for bank analysts July 16 (the evening before the bank’s second-quarter earnings announcement), he cited the release in arguing that the bank had already admitted “criminal responsibility for money-laundering.” (You can listen to the teleconference here.)

But the nonprosecution agreement had actually resolved two criminal inquiries — one pertaining to Edwards’s conduct and the other pertaining to a completely unrelated fraudulent loan scheme aided by managers at a Bank of New York branch in Island Park, N.Y., on Long Island. The amended release clarified that the bank had only admitted criminal conduct in connection with the Island Park inquiry. (Here’s the original release; here’s the amended release.)

As reported in the feature story, when I informed Marks of the amended release, Marks expressed exasperation at the “power” of the bank to “influence” the Justice Department to “potentially help the wrongdoer” in pending civil litigation. But he also insisted that the non-prosecution agreement still amounted to an acknowledgment of criminal conduct by the bank, because the bank had acknowledged “responsibility” for what had happened in that document.

However, in the letter Fortune obtained yesterday and is publishing today, the government appears to reject that argument as well, writing: “While the Bank accepted and acknowledged responsibility for the conduct detailed in the [non-prosecution agreement,] the Bank did not admit criminal culpability with respect to the subject of the SDNY USAO investigation,” i.e., the probe relating to Lucy Edwards.

The letter also notes that “statements in the Press Release . . . are not themselves part of any agreement with the Bank.”

As of this writing, Marks has not yet responded to an e-mail seeking comment on the July 29 Justice Department letter, which I sent to him yesterday at about 12:30 pm Eastern Time.

Why does it matter if the bank has admitted criminal conduct? Two reasons. The first relates to a statute of limitations hurdle Russia faces. Lucy Edwards pleaded guilty in February 2000, yet Russia did not file its suit until May 2007. (The statute of limitations for civil RICO suits is four years and, according to the Bank’s lawyers, the applicable Russian statute is even shorter.) Marks has responded that, whether Russian or U.S. law applies, the statute of limitations is subject to a so-called “discovery rule”; i.e., the statute begins running only once a party discovers that he’s been injured (and by whom).

Under that rule, Marks has argued, the statute should not start running until Nov. 8, 2005, when the bank signed the non-prosecution agreement, because that’s the first time Russia discovered that the bank had been criminally involved. Since the bank had until then always protested its innocence, Marks believed that when it entered into the non-prosecution agreement it suddenly reversed its position. This purported about-face is what, he had argued, reset the statute-of-limitations clock. As he argued at the July 16 teleconference “The bank had . . . represented that it had no role in the criminal activity . . . until November 2005.” That was “the very first time” Russia “became publicly aware of involvement by the bank.” (Listen to “Podcast #3 on Marks’s site, available here.)

The prosecution’s clarification seems to wipe out that argument, since no change actually occurred in the bank’s position. (As a backup argument, Marks also contends that one type of relief he seeks under RICO — “disgorgement” — is an “equitable” form of relief, which is not subject to a rigid statute of limitations, but subject only to a more flexible doctrine of time limitation known as “laches.” But most U.S. courts begin their “laches” analyses by looking to the most analogous statute of limitations, which probably just brings Russia back to civil RICO’s four-year limit. There seems, moreover, to be no good “equitable” reason to grant Russia leniency here, since, as explained in my feature story, U.S. prosecutors actively sought the assistance of Russian authorities with their investigation back in 1999, but appear to have been largely rebuffed at the time. For whatever reason, Russian officials at the time were downplaying the gravity of what Edwards had done, and maintaining that most of her illicit wire transfers had not violated Russian law.)

The second reason that the bank’s purported admission of criminal conduct was important to Russia’s case has to do with jurisdiction. The court in which it has filed its case — the arbitrazh court in Moscow — is a commercial court, and is not authorized to interpret “public laws,” which include criminal laws (even Russian criminal laws, let alone American criminal laws). Russia had hoped to circumvent this problem by arguing that there was no need for the arbitrazh court to interpret U.S. criminal statutes, since the bank had already admitted criminal culpability. Thus, the arbitrazh court would only be required to interpret the civil aspects of the RICO law, which were more arguably within its jurisdiction.

Again, this argument would seem to be weakened, if not obliterated, by the recent clarification made by U.S. prosecutors.

Of course, all of this only matters if the court hearing the case has the judicial independence to rule against the Russian government — a big if.

Pretrial hearings in the case are set to resume in Moscow on Oct. 6.

This fall the U.S. Supreme Court will decide whether to hear a case of great interest to the $1 trillion non-profit healthcare industry: whether that sector, especially non-profit HMOs, will continue to qualify for tax-exempt status.

In 2002, the Internal Revenue Service stripped Vision Service Plan — a national HMO that reimburses for optometry services not covered by most medical plans — of the tax-exempt status it had enjoyed for 42 years, notwithstanding that there had been no change in the applicable laws or regulations and no change, VSP maintains, in its business model.

“This is, in essence, an attack on the non-profit HMO model,” says former independent counsel Ken Starr, who filed VSP’s petition seeking Supreme Court review of the case last month, and who says he expects the Court to rule on the petition in November.

Starr maintains that the case “far transcends VSP,” and is being “very closely watched” throughout the entire non-profit healthcare industry. Starr is now of counsel at his long-time law firm Kirkland & Ellis, as well as dean of the Pepperdine Law School.

Of course, it’s Starr’s job to hype the case — it’s one way to try to persuade the Supreme Court to hear it — but Thomas K. Hyatt, the co-author of the treatise The Law of Tax-Exempt Healthcare Organizations, confirms in an interview that VSP’s case has created significant “problems in the field,” and that it tees up important issues for “all nonprofits arranging for healthcare, which is the way most modern HMOs operate.” By “arranging for healthcare,” Hyatt means those HMOs that send enrollees to networks of participating healthcare providers, rather than requiring that they see staff doctors actually employed by the HMO itself. (Hyatt is a partner at the Baltimore-based Ober Kaler law firm.)

Historically, Hyatt explains, most non-profit HMOs have been eligible for tax-exempt status either under 501(c)(3) or 501(c)(4) of the Internal Revenue Code. Those that used their own staffs of doctors, like Kaiser-Permanente, could often qualify for (c)(3) status, which, unlike (c)(4) status, not only confers exemption from income tax but also provides that donations to the organization will be tax-deductible. Other HMO business models, however, like those that use contracting networks of doctors, could still usually qualify for 501(c)(4) tax exemption, which is what VSP had enjoyed since 1960. (Under the regulations, to qualify for 501(c)(4) status, an organization must be “primarily engaged in promoting … the common good and general welfare of the people of the community.” In the past, providing healthcare services was, itself, considered a service to the community.)

In 1986, Congress amended the law to strip providers of “commercial-type insurance” of their tax-exempt status, in a move that was targeted at many Blue Cross insurers, which were felt to be getting an unfair advantage over their for-profit competitors while operating, in practice, in almost identical ways. But that legislation contained a safe-harbor provision that was widely understood to preserve the tax-exempt status of most nonprofit HMOs. (The provision specifies that “commercial-type insurance” won’t include “incidental health insurance provided by a health maintenance organization of a kind customarily provided by such organizations.”)

VSP continued to enjoin its exemption for another 13 years, but in 1999, shortly after the company expanded from a regional to a national operation, the Internal Revenue Service opened an inquiry into its status. In 2002, without making clear whether the 1986 amendment played any role in its thinking, the IRS revoked VSP’s tax-exemption, effective Jan. 1, 2003, explaining that a nonprofit health care provider that limits its benefits to a class of subscribers (its enrollees) would no longer be eligible for tax exemption unless it also provided some unspecified amount of additional “community benefits.” (Since more than 40% of VSP’s enrollees were participants in Medicaid, Medicare, or comparable state-sponsored programs, and VSP was contributing millions of dollars worth of services each year to charities like Sight For Students, VSP claims that the IRS’s determination was vague and arbitrary.)

VSP began paying taxes in 2003, but it also filed suit that year to recover those taxes. In December 2005, U.S. District Judge Lawrence Karlton of Sacramento ruled for the IRS in an opinion that stressed that VSP was not an actual provider of healthcare services, but an “arranger” of such services. (While this fact had previously been seen as a factor disqualifying an organization from (c)(3) status, it had not been previously thought to disqualify an organization from (c)(4) status.)

Judge Karlton did not discuss the 1986 amendment or its safe harbor. Instead, he focused on the commercial manner in which VSP operated. (Under IRS regulations, an organization isn’t being operated primarily to promote social welfare if it is being operated “in a manner similar to organizations which are operated for profit.”) Judge Karlton emphasized, for instance, that the company earned $34.5 million in net income in 2003 and that the company’s top executives received bonuses drawn from that net income. He also noted the relatively high salaries of its top executives (the CEO had received $395,000 plus bonuses in 2003) and that they enjoyed perks like the use of a “luxury company car.”

VSP appealed to the U.S. Court of Appeals for the Ninth Circuit, which then affirmed in a terse, opaque, three-paragraph ruling that did not discuss the 1986 amendment, its safe harbor, or either issue Judge Karlton had focused upon. Instead, the three-judge panel ruled that VSP was not “primarily engaged in promoting . . . the common good and general welfare of the people of the community” because it was primarily organized to benefit its own “subscribers rather than the general welfare of the community.” The Ninth Circuit’s ruling was also “unpublished,” meaning that, notwithstanding all the attention nonprofit lawyers around the country had been giving the crucial case in hopes of receiving guidance to pass along to clients, lawyers were not supposed to treat the ruling as carrying precedential weight.

VSP’s Supreme Court counsel Starr filed its certiorari petition in August, and last week it received amicus brief support from, among others, the three charities with which it partners in its Sight For Students program: Prevent Blindness America, the National Association of School Nurses, and the National Council of La Raza. The government, represented by assistant to the Solicitor General Gregory G. Garre, is expected to file a response on Oct. 10.

At stake, Starr asserts, is whether the IRS — without having received any direction from Congress — will succeed unilaterally in “driving the healthcare system to a for-profit business model, even though it’s universally agreed that non-profit has been a very efficient and successful model.”

Not since the Reagan administration allegedly classified ketchup as a vegetable to save money on the federal school-lunch program, have the Democrats found such a potent symbol of Republican callousness. But Republicans insist that this latest purported gaffe is a complete fabrication.

As many blogs have reported, the Obama campaign and the Democratic National Committee have sued the Macomb County (Michigan) Republican Party, the Michigan Republican Party and Republican National Committee to prevent them from pursuing an outlandishly unseemly “voter suppression” tactic which Republican officials have already disavowed ever having contemplated: a plan to challenge voters’ residency qualifications if their homes have recently been foreclosed.

The complaint, filed in federal court in Detroit, is here.

The suit was triggered by this controversial article in the Michigan Messenger, an online political daily published by the nonprofit Center for Independent Media.

In the article, which came out September 10, writer Eartha Jane Melzer quoted James Carabelli, the chairman of the Republican Party of Macomb County, Michigan (a northeastern section of the Detroit Metropolitan area), as saying, “We will have a list of foreclosed homes and will make sure people aren’t voting from those addresses.” The plan, according to the article, was to mount challenges to voters who’d lost their homes on the theory that they might no longer reside within the precincts where they were registered. (According to RealtyTrac, a site that monitors foreclosures nationwide, Detroit led the nation in foreclosures in 2007, with close to 72,616 filings, reflecting almost 5% of all households.)

Carabelli responded a few days later with this press release, asserting that “The story is not true. The Michigan Messenger made it up.” He also demanded a retraction.

The state Republican party chairman, Saulius Anuzis, condemned the story in the same release, saying: “What we have here is a liberal blog funded by a liberal billionaire pushing a fabricated story that supports a liberal agenda. Never in my 30 years in politics have I seen the mainstream media pick up such a completely false and utterly ludicrous story as this one and run with it with such glee.” (The Messenger describes itself as “As a coalition of long-time progressive bloggers, freelance writers and professional journalists,” and the Center for Independent Media is partly funded by George Soros’s Open Society Institute.)

The Messenger has stood by its story. Reporter Meltzer’s editor, Jefferson Morley, wrote here that Melzer’s “notes show that she asked [Carabelli] about plans to have election challengers at the polls on Election Day. As they spoke, she typed a question about Republican voter challengers: ‘How will they know if the addresses match? How will you know which addresses to check?’ Her notes show that Carabelli responded, ‘We will have a list of foreclosed homes and will make sure people aren’t voting from those addresses.’ Melzer’s notes then show she asked a follow-up question: ‘How will you know people are who they say they are?’ Carabelli responded, ‘I would rather not tell you all the things we are doing.’”

It is, of course, not unusual for Republican Party officials to organize “election integrity” or “ballot security” challenges in what they say are efforts to prevent voter fraud; Democratic Party officials routinely decry these efforts as voter intimidation and voter suppression, and they have from time to time sued to stop them — sometimes successfully. Melzer’s story quotes two additional Michigan Republican Party officials as confirming that the party is, indeed, “gearing up for a comprehensive voter challenge program” for the upcoming Presidential election, and nobody has disavowed that portion of the story.

During the last presidential election, the DNC sued to stop a Republican attempt to challenge the residency of 35,000 voters in Franklin County, Ohio (around Columbus), two weeks before the election. In that instance, party officials sent letters to voters, and if the letters were returned to sender the voter’s residency was challenged. A federal judge in Columbus enjoined the effort, finding that the “timing and manner” of the challenges likely violated the voters’ constitutional and statutory rights, and an appeals court affirmed.

In the lawsuit filed Tuesday, attorneys for Obama for America acknowledge that Macomb County Republicans now deny having ever planned to use foreclosure notices to mount voter challenges, but they characterize these protestations as “public relations maneuvers under pressure” which provide “little comfort when compared with the Defendant Republicans’ clear statements on the record of their plans and their long history of voter suppression tactics.”

Chris Taylor, a spokeperson for the Republican National Committee says, “The RNC would not, has not, will not use foreclosure lists as a basis of any challenge lists.” He continues, “The Democrats have hung quite a bit on this one quote in a liberal blog post that’s been challenged as inaccurate, and we need to know what else they have to support their claim.”

(Foreclosure proceedings, even if they force a homeowner to move, will not necessarily affect his or her voter registration, but the precise rules vary locally. According to a press release issued by the county clerk for Macomb County: “A registered voter who moves from one precinct to another within the same city or township may vote one last time in the precinct where registered. A registered voter who moves from one Michigan city or township to another can vote one last time in the precinct where registered if the move was made within 60 days of the election.”)

For people looking for distractions from the fact that their 401k’s have recently vanished, here are a couple odds and ends.

Dan Levine at Cal Law’s Legal Pad (no affiliation to this site and, mea culpa, they were apparently using the Legal Pad name first) has this update on class-action impresario Bill Lerach’s rocky adjustment to life in the federal prison system. Lerach’s been transferred to a medium-security institution in Phoenix, Levine reports, after an incident at the minimum-security camp in Lompoc, Calif., in which he allegedly offered a guard the use of his San Diego Chargers tickets.

For a very unrelated curiosity, try this Web site called beautifullawyers.com, where you can buy a calendar displaying 12, physically attractive Massachusetts lawyers. (Should that be the 12?) They include both men and women, and the clothing is revealing only in a socioeconomic sense. Proceeds allegedly go to charity.

The “Beautiful Lawyers” logo includes, as the “i” in word ‘beautiful,’ a statuette of a statuesque woman holding something; I’m not sure, but it seems to be a hand-mirror, of the “Whose the fairest of them all?” variety. I’ve been badly scooped on this story, I should admit; Karen Donovan at Portfolio.com did this item on it three months ago.

For people looking for distractions from the fact that their 401k’s have recently vanished, here are a couple odds and ends.

Dan Levine at Cal Law’s Legal Pad (no affiliation to this site and, mea culpa, they were apparently using the Legal Pad name first) has this update on class-action impresario Bill Lerach’s rocky adjustment to life in the federal prison system. Lerach’s been transferred to a medium-security institution in Phoenix, Levine reports, after an incident at the minimum-security camp in Lompoc, Calif., in which he allegedly offered a guard the use of his San Diego Chargers tickets.

For a very unrelated curiosity, try this Web site called beautifullawyers.com, where you can buy a calendar displaying 12, physically attractive Massachusetts lawyers. (Should that be the 12?) They include both men and women, and the clothing is revealing only in a socioeconomic sense. Proceeds allegedly go to charity.

The “Beautiful Lawyers” logo includes, as the “i” in word ‘beautiful,’ a statuette of a statuesque woman holding something; I’m not sure, but it seems to be a hand-mirror, of the “Whose the fairest of them all?” variety. I’ve been badly scooped on this story, I should admit; Karen Donovan at Portfolio.com did this item on it three months ago.

With this morning’s Chapter 11 filing by Lehman Brothers’ parent company (LEH), we’re about to find out whether the bankruptcy laws cushion the impact of a behemoth investment bank’s insolvency on our financial system — as intended — or if those laws, instead, inadvertently exacerbate the problem. The rules have never been tested as they’re about to be.

“I think it’s a really scary time right now,” says Ed Morrison, a professor and bankruptcy expert at Columbia Law School.

In essence, Morrison explains, bankruptcy laws have evolved since 1978 in ways that actually leave investment banks like Lehman Brothers less protected than most debtors would be from hordes of creditors “descending on [it] and tearing it apart,” as Morrison puts it.

But those laws have been written specifically for the purpose of limiting systemic harm from a collapse like Lehman’s, and averting financial meltdown. Whether they really work that way in practice is what no one really knows.

First, the basic facts: Lehman Brothers’ holding company has filed for Chapter 11 bankruptcy protection, but none of the U.S. subsidiaries have. As a practical matter, its brokerage-dealer subsidiaries, asset management unit, and investment management division are all supposed to continue operating as normal.

All U.S. divisions still remain under control of management, and the expectation is that Lehman will try to sell the most attractive operating divisions while liquidating the rest. (Individual investors who have accounts with Lehman’s broker-dealer subsidiaries are supposed to be protected, as their assets are not available to Lehman’s creditors, and their accounts are further protected by the federal Securities Investor Protection Corporation.)

Here’s what makes the bankruptcy of an investment bank unusual. An ordinary bankruptcy petitioner, like an airline or a steel mill, gets immediate protection from its biggest creditors by the operation of law: as soon as it files for bankruptcy, an “automatic stay” takes effect which prevents those creditors from going forward with lawsuits and seizing the debtor’s assets. Metaphorical runs on the bank are prevented, and management gets time to organize its affairs in a way that will, theoretically, maximize value for all creditors, and maybe even allow the company to reemerge in sound health.

With a financial institution, however, the automatic stay offers no protection against many of its most important creditors. In a trend that began in 1978 and was greatly expanded in amendments passed in 2005, most financial contracts — including securities contracts, swaps, repurchase agreements, commodities contracts, and forward trades — are unaffected by automatic stays.

Worse still, as soon as Lehman’s parent corporation goes into bankruptcy, that event (under the contractual language governing most of these) triggers default, allowing the counterparty — the bank or other institution that entered into the deal with Lehman — to immediately accelerate or cancel the contract and seize whatever collateral may cover it.

Why? The thinking, Morrison explains, was that if an investment bank like Lehman ever failed, all its counterparties (like, say, a Bank of America) could extricate themselves immediately from Lehman’s troubles rather than getting mired in a bankruptcy proceeding.

“They won’t be locked in and dragged down with Lehman,” Morrison says. The laws will — theoretically — minimize risk of market meltdown.

Now comes the downside potential. The risk is that lots of these commercial counterparties will choose to terminate their financial contracts with Lehman — say, for instance, credit default swaps — all at once, and then try to rehedge themselves all at once, causing the market to seize up.

“This was one of the big fears that led to the federal government decision to orchestrate a bailout of Long Term Capital Management in the 1990s,” he says.

The International Swaps and Derivatives Association (ISDA) held a special trading session yesterday — on a Sunday — in an effort to “mitigate counterparty credit risk” stemming from the events going on at Lehman, according to a press release the group issued. But it’s far from clear if these kinds of efforts will do the trick.

“The lesson of all this,” says Morrison, “is that once a major institution has hit major distress, there’s nothing bankruptcy law can do. It’s too late. What’s needed is either federal intervention, or federal oversight earlier in the process” to prevent the faulty decisions that led to insolvency.

I don’t usually do pure “aggregation” type referrals on this column/blog, but I’ll make an exception this morning. In the character-is-destiny department, people may not want to miss today’s update in The Recorder (a San Francisco-based daily affiliated with The American Lawyer) about erstwhile class-action impresario Bill Lerach, who is now, of course, imprisoned at the U.S. Penitentiary in Lompoc, California. The Recorder reports that Lerach was sent to administrative segregation (23-hour lockdown, also, I think, known as “the hole”) earlier this summer after allegedly offering San Diego Chargers tickets to a prison guard. The Recorder said Lerach’s lawyer, John Keker, was not available to comment.

I don’t usually do pure “aggregation” type referrals on this column/blog, but I’ll make an exception this morning. In the character-is-destiny department, people may not want to miss today’s update in The Recorder (a San Francisco-based daily affiliated with The American Lawyer) about erstwhile class-action impresario Bill Lerach, who is now, of course, imprisoned at the U.S. Penitentiary in Lompoc, California. The Recorder reports that Lerach was sent to administrative segregation (23-hour lockdown, also, I think, known as “the hole”) earlier this summer after allegedly offering San Diego Chargers tickets to a prison guard. The Recorder said Lerach’s lawyer, John Keker, was not available to comment.

With former super-lawyer Richard F. “Dickie” Scruggs now serving a federal prison term for conspiring to bribe one state judge, and a federal grand jury reportedly looking into whether he conspired to bribe a second one (see also here), State Farm’s lawyers have been relentlessly pursuing a parallel crusade to expose and civilly punish Scruggs for a long laundry list of other alleged wrongdoing.

State Farm’s accusations stem from how Scruggs allegedly conducted his last great litigation campaign, in which he accused State Farm and other insurers of improper claims-handling practices along the Mississippi Gulf coast in the wake of Hurricane Katrina. (Scruggs’s bribery conviction stems from an attempt to influence a lawsuit peripheral to that campaign. in which co-counsel were arguing over how to divvy up attorneys fees.)

My best effort to untangle Scruggs’s assault upon the insurers – which often seemed like a 15-ring circus — was contained in this feature story I wrote for Fortune in April.

But lots has happened since then, particularly over the last two months when I and, probably you, were on vacation. You may have already seen references to some of these developments — including two new depositions from two colleagues and social friends of the State Farm “insiders” who worked with Scruggs, Kerri and Cori Rigsbys –  on the invaluable Yall Politics and Insurance Coverage Blog sites, but I will try here to put that new evidence in some context, add some original reporting, and mention a few things that look important to me that haven’t been noted yet.

Since Internet publishing solons keep telling me that nobody reads more than 700 words at a stretch on the Web (a devastatingly ominous message for someone who does what I do for a living), I’ll try to break this update into palatable, bite-sized pieces, each dealing with a different issue.

In overview, in the unsettled remnants of the suits against State Farm that were originally brought by Scruggs (now being handled by other counsel, obviously), State Farm now alleges that Scruggs manufactured portions of his case against State Farm; induced State Farm insiders to violate their contractual duties; illegally broke into State Farm’s password-protected computer database; tampered with his own witnesses’ or clients’ computers to destroy evidence; compensated witnesses in unethical ways; violated one court’s injunction; and violated another court’s confidentiality orders.

Scruggs’s criminal counsel, John Keker, declined comment for this article, and Scruggs himself invoked his Fifth Amendment right to remain silent when asked about State Farm’s accusations at a civil deposition in July. (He also invoked the Fifth when asked for his date of birth, so his assertions of privilege in this context really should not be seen as admissions to the specific allegations State Farm is making.)

While one judge has already found Scruggs in civil contempt for violating an injunction (a ruling now on appeal) and another has found that he did, in fact, compensate witnesses unethically, most of State Farm’s other accusations remain far from proven.

I’ve broken this update into these six topics:

Part I: Key witness will finally testify

Part II: When Kerri met Dickie

Part III: Was there a third insider?

Part IV: Computer funny business

Part V: “Trailer Lawyers”

Part VI: Violating confidentiality orders

[This part of a series. See the introduction here.]

In a little noted filinglast week State Farm revealed that one of its claims-adjusting supervisors, Alexis (“Lecky”) King, is now available to testify in a handful of Hurricane Katrina-related civil suits that are still being waged against the insurer by plaintiffs originally represented by Dickie Scruggs.

Though King’s name may still be unfamiliar to many, she was a pivotal figure in Scruggs’ post-Hurricane Katrina assault upon State Farm and other insurers. Again, my earlier feature story explains this in greater detail, but the whirlwind summary is this:

Scruggs’ litigation began as an audacious, full-frontal attempt to simply nullify the insurers’ standard flood-exclusion language as “unconscionable.” That effort went nowhere in the courts.

In October 2005, however (about a month-and-a-half after the hurricane hit), Scruggs nimbly switched gears and his suits gained traction after a supervisor in State Farm’s Gulfport cat (for “catastrophe”) office ordered an engineering firm to re-inspect a number of Katrina-damaged homes. That supervisor was Lecky King.

While King told the engineering company that two of previous reports had been unconvincingly, if not incompetently, performed, two claims adjusters working in the cat office – sisters Kerri and Cori Rigsby – interpreted King’s order as sinister and began secretly working with Scruggs. Scruggs and the Rigsbys would later argue that the supervisor had really been ordering the engineers to redo reports in order to fraudulently mischaracterize wind damage, for which State Farm was liable, as flood damage, which was excluded from coverage and would be paid, if at all, only by the federal government’s National Flood Insurance Program. The Rigsbys, working as secret insiders at the State Farm cat office, eventually collected thousands of confidential State Farm documents which they gave to Scruggs, as well as to state attorney general Jim Hood and U.S. Attorney Dunn Lampton.

Whether or not State Farm played fair with its engineering reports, in almost all cases both the original and revised reports were preserved in State Farm’s files, with no one having made any attempt to destroy anything. The lone possible exception was the document that started the whole ball rolling – an October 12, 2005, engineering report performed on the property of one Thomas McIntosh.

Lecky King thought the McIntosh report reached such outlandish and unsupportable conclusions that she threatened to fire the engineering firm that had performed it. Its engineer had found no flood damage at all – only wind damage — even though experienced State Farm adjustors (including, ironically, Kerri Rigsby herself) had already documented in photographs extensive apparent flood damage there and had, accordingly, already okayed payment to McIntosh of the policy limits on his federal flood policy — $350,000.

Kerri had been in the process of routinely filing the McIntosh report away in the appropriate file cabinet when, she has testified, she noticed that it had a sticky-note on it saying “Put in Wind file. Do NOT pay bill. Do NOT discuss.” Kerri became suspicious that something fraudulent was going on. She has claimed that she then photocopied the document, took the original back to King, and said something like, “I guess I wasn’t supposed to see this.” According to Kerri, King allegedly responded, “No, you weren’t,” and took it.

The original of the report has never been located.

So, when (bigtime-Scruggs-campaign-fund-recipient) Mississippi attorney general Jim Hood commenced a criminal investigation (at Scruggs’ prompting) and issued a document subpoena to State Farm in March 2006, State Farm didn’t produce that McIntosh report, because it wasn’t in their files. Since Kerri and Scruggs had a photocopy of that original report, they could, and did, argue that State Farm was concealing and “shredding” documents in an apparent effort to criminally hide damning evidence.

State Farm has all along suggested that it didn’t produce the October 12 McIntosh report for the simple reason that Kerri Rigsby improperly took it (or “stole it”) rather than filing it away the way she was supposed to. State Farm has theorized that Scruggs knew this and, indeed, that this was the whole reason Scruggs seemed so preternaturally certain all along that State Farm wouldn’t produce the McIntosh report in response to subpoenas. It is true, for instance, that in April 2006, long before State Farm had had a chance to respond to Hood’s subpoenas, attorney general Hood seemed to anticipate that State Farm wouldn’t be able to produce it. In a court proceeding concerning that document subpoena he told a state judge, “See, we already have these documents. . . . We’re just going to see if they [State Farm] actually give us what is written on them and stuck to them and so forth.”

It does seem odd to me that Hood already suspected State Farm would fail to provide what he was nominally looking for. But State Farm’s never been able to substantiate its theory, in part because, once Hood commenced his grand jury investigation, Lecky King’s lawyers instructed her to invoke her Fifth Amendment privilege against self-incrimination rather than provide any testimony about any of the pertinent events.

Now it’s not unusual for criminal defense lawyers, out of an abundance of caution, to advise clients – regardless of innocence or guilt – to broadly invoke the Fifth if they are implicated in any way in a criminal inquiry. Scruggs’ own criminal lawyers are now instructing him to do exactly the same thing. At a depositionof Scruggs taken just last month by State Farm lawyer James Robie, Scruggs took the Fifth in response to every question except: What is your name?

But when King took the Fifth, things took a grim turn for State Farm, and the settlement value of Scruggs’ civil cases against State Farm skyrocketed. State Farm could not go before a jury and have a supervisor take the Fifth Amendment. A jury would assume the worst and hit the company with punitive damages. (Though invoking the Fifth can’t be used against you in a criminal case, it can be used against you in a civil case.)

Over the last month, State Farm finally got a speck of corroboration for its theory that the original McIntosh report disappeared because Kerri Rigsby took it, rather than because Lecky King deep-sixed it. In July it deposed two former Rigsby colleagues who were also close social friends of the Rigsbys as well: claims adjuster Tammy Hardison and her assistant, Dana Lee.

Lee testified that she remembered Kerri actually showing her the original McIntosh report, at Kerri’s or Cori’s home, with the original “yellow” sticky note still attached to it (thus, not a mere photocopy).

“She showed me . . . an engineer report,” Lee testified, “that had a sticky note on it. . . . And she said, well, what do you think of the note. And . . . I flipped it over and looked at the underside and I said, well, I don’t know who wrote it. They didn’t sign it. . . . I don’t think that’s unusual for a sticky note like that to be in the file.”

One of the Rigsbys’ current counsel, Scott Gilbert, declined to comment on any of the contents of the Hardison and Lee depositions (which I’ll be returning to in subsequent parts of this series) except to say that the Rigsbys “have a very different view” of events. Gilbert notes that his firm has just entered the case recently, so it is not fully prepared to comment, but also that, in any case, the firm “intends to try the case in front of [U.S. District Judge L.T. Senter , Jr.] instead of in the newspapers.” He also notes that the Rigsbys were not present or represented at the Hardison and Lee depositions and, accordingly, were unable to probe or challenge the deponents’ recollections. (Obviously, this represents a dramatic change in tack for the Rigsbys; Scruggs had had Kerri appear in a Scruggs Katrina Group television ad and had had both sisters star in a 10-minute ABC “20/20″ episode in August 2006 that very bluntly accused State Farm of systematically “cheating” Katrina victims out of millions of dollars due them.)

The Rigsbys mother, Pat Lobrano (whose role in the whole matter is discussed in Part II) is more outspoken in denouncing the Hardison and Lee depositions. “Obviously, State Farm put a great deal of pressure on them to deliberately misrepresent the truth under oath,” she says in an interview, suggesting that Hardison and Lee are afraid of losing their State Farm jobs if they don’t provide helpful testimony.

In any case, I frankly think that Lee’s testimony falls short of proving that Kerri took the originals of the McIntosh report. Though I don’t question her good faith, memory plays too many tricks on all of us, and it’s just too easy to misremember these sorts of then-insignificant, now-crucial details almost three years after the events took place.

Personally, I’d still rather hear from Lecky King than from Dana Lee. Fortunately, as State Farm revealed in that unheralded filing earlier this month, I’m going to get that opportunity, as will the rest of the world. (Presumably King’s lawyers think there’s no longer any realistic chance that either state or federal prosecutors would go forward with a criminal case.)

[This is part of a series. The introduction is here.]

The Rigsbys and Scruggs have always portrayed the Rigsbys’ secret photocopying of confidential State Farm documents (in arguable violation of confidentiality clauses in their contracts) as having been self-initiated, rather than directed by Scruggs. While it would probably be illegal for Scruggs to have directed the Rigsbys to use their inside position to collect confidential State Farm documents, it may have been defensible for the Rigsbys to collect those documents on their own, as the high-minded acts of whistleblowers whose primary intent was to turn them over to law enforcement to stop a crime in progress.

While the Rigsbys and Scruggs have always maintained that they did not meet until February 2006, well after the Rigsbys started collecting documents, State Farm theorizes that Scruggs actually struck some sort of unholy alliance with them much earlier. The deal allegedly had much to do with the predicament of the Rigsbys’ mother, Pat Lobrano. Lobrano’s own home in Ocean Springs, Mississippi, had been severely damaged by Katrina-related flooding, which was going to be excluded from coverage under her State Farm homeowners policy and that was inadequately insured under federal flood policies. (In an interview, Lobrano says her insurance agent had incorrectly advised her that she had the maximum insurance available.)

Hardison and Lee describe Lobrano and her husband (the Rigsbys’ stepfather) as being depressed and distraught immediately after the storm, but within a couple weeks the two underwent what Hardison and Lee describe as an abrupt change in mood. The Lobranos suddenly started hiring contractors to repair their home. (“You have to do that,” Lobrano says in an interview with me, or the house will deteriorate further and the policyholder will be responsible.) State Farm’s implication is that the turnaround may not merely have been a matter of mental resilience, but that some pecuniary assistance, or at least the prospect of it, had already arrived.

State Farm suggests that the Rigsbys, Lobrano, and Scruggs all pow-wowed much earlier than they have previously admitted. Mississippi’s deputy insurance commissioner has previously testified that at a meeting with Scruggs on December 15, 2005 – long before the Rigsbys and Scruggs have admitted meeting each other — Scruggs was already boasting that he had two State Farm “insiders” helping him and that he was going to “work it” (i.e., his attack upon the insurance industry) the same way he and Mike Moore had handled their celebrated attack upon Big Tobacco. (Scruggs’s use of insiders in the tobacco litigation was later chronicled in the movie, “The Insider.”)

Around Christmas 2005 or New Years 2006, Hardison and Lee remember being in Cori’s den when the Rigsbys were watching a DVD of “The Insider” and speculating about which actors would play each of them when the movie of their own exploits came out. (“Kerri kept saying that Sandra Bullock was going to play her,” Hardison testified.)

“We are going to get a book deal,” they’d say, according to Lee. “We’re going to make a movie. We’re going to be famous.”

Lobrano told the [Biloxi-Gulfport] Sun Herald, however, that she had recently verified with her video store that she checked out that movie for her girls on February 27, 2006, just after she has previously said that Scruggs came to see them for the first time. In an interview with Fortune, Lobrano adds that the meeting with him was “very secret,” and that there were “certainly no comments about Kerri being in a movie.” She says that she thinks the Sandra Bullock reference comes from someone’s blog comment shortly after the Rigsbys’ “20/20″ appearance.

Next, State Farm implies that Scruggs may have engineered the sudden sale of Kerri’s (undamaged) home under a contract signed in December or January, with the closing occurring in late February or March 1, 2006. Both Hardison and Lee testified that although Kerri’s house had not even been on the market, it was suddenly sold for about $600,000, which they say was about twice its purchase price.

The house was sold to a Robert H. Oswald, an eminent former judge in South Mississippi, and one of Scruggs’s co-counsel in Mississippi’s original Medicaid-reimbursement suit against the tobacco companies in 1994. (According to his office, Oswald was unavailable for comment for two weeks, and unreachable by e-mail.)

But, again, there may be less here than meets the eye. In an interview, Lobrano says that the idea of selling the house originated with Kerri’s real estate broker, Jerry Rimes of Ellis Branch Realty, and Rimes, in an interview, backs up Lobrano’s story. Rimes says that after Katrina, many people whose homes had been wrecked in the storm (as Judge Oswald’s had been) were searching for undamaged homes, and it was not unusual for Rimes to make cold calls to former clients to see if they’d be interested in selling. Rimes also says she’s “sure” the selling price was actually less than $500,000, contrary to Hardison and Lee’s testimony.  (By coincidence the house is on the market again right now, and can be viewed here; the current asking price is $495,000.)

(For historical context, I should note that Scruggs is known to have, years ago, arranged the purchase of a home for one of the insiders then helping him with his tobacco campaign, Merrill Williams. Scruggs admitted the Merrill Williams purchase, as well as about $2 million in other payments to Williams, in a 2004 deposition. (See pages 240-241 of the first volume of that deposition and page 479 of the second volume.)

Finally, Lee and Hardison also claim in their depositions that the Rigsbys improperly tried to influence the State Farm adjuster handling their mother’s claim, but the adjuster disqualified himself and sent the claim to an adjuster who didn’t know the sisters. In earlier testimony, the Rigsbys have denied trying to improperly influence their mother’s claim in any way.

[This is part of a series. The introduction is here.]

The newly available Tammy Hardison and Dana Lee depositions also shed light on an arcane question that I have posted on before, and that State Farm has been aggressively trying to answer: was there a third insider? The question stems from an isolated interview Scruggs gave to a Bloomberg reporter on March 30, 2006, in which he claimed to have made a trip to Bloomington, Illinois (State Farm’s headquarters) where he met with an insider and picked up a trove of incriminating documents that he was about to turn over to attorney general Hood. Scruggs never again referenced a Bloomington insider, leaving Scruggs-ologists to wonder: Had he just made this story up out of whole cloth and, if so, why?

Hardison and Lee said that, according to the Rigsbys and Lobrano at least, Scruggs did fabricate the story, and that he did so, indeed, with a gusto that even jaundiced Scruggs-watchers might not have imagined.

By March, Hardison said, colleagues at the Gulfport cat office were beginning to suspect the Rigsbys of being moles for either Scruggs or attorney general Hood. Accordingly, Hardison testified, Scruggs wanted to “throw suspicion off” the Rigsbys and send it, instead, to State Farm’s central office in Bloomington. Here’s what he allegedly did:

“So he either flew a jet, flew his jet out there,” Hardison testified, “hired some guy to meet him at the airport, called Bloomington and tipped them off and said that Dickie is there to meet somebody. And Pat [Lobrano] kept going, he loves all this. . . . And I was going, what was in the package? They were, like, oh, probably nothing. . . . They were laughing about it. . . . He loves cloak and dagger, you know.”

In an interview with me, Lobrano says she remembers “the whole Bloomington thing” but not any specifics of what was said. “I don’t know if [Scruggs] did that, if it was true. If he did, he would’ve been trying to protect the girls and we would’ve appreciated that.”