Palco Wins Dismissal of Fraud Case

The Pacific Lumber Company has won a key court victory, as the fraud case that inflamed tempers and spawned a bitter recall election has been dismissed by a judge.

A ruling handed down last week by Superior Court Judge Richard Freeborn sustains Palco's motion to strike District Attorney Paul Gallegos' fraud lawsuit based on state and federal laws that limit liability connected to information exchanged during government agency reviews. One of Gallegos' first and most politically-charged actions as a D.A., the fraud lawsuit accused Palco of presenting false landslide reports and intentionally withholding corrections during reviews that led to the 1998 Headwaters Deal.

The lawsuit claimed that the circumstances surrounding Palco's submittal of an incorrect draft study on the relationship between landslides and timber harvesting in the Jordan Creek watershed amounted to an act of fraud that allowed the company to reap $40 million in extra annual profits. The 2002 suit defined Gallegos as a hero to many of Palco's detractors, but the company viewed it as a low blow.

Its accusations were not the subject of Palco's motion, but Freeborn's ruling goes beyond the question of prosecution immunity and at one point, he indicates that he disagrees with a previous judge's decision not to dismiss the suit from the outset. That judge later recused himself after the D.A requested his disqualification due to concerns about bias.

Gallegos has issued a press release contesting the ruling, but he did not return a phone message by press time and has not indicated whether he will file an appeal. He disagrees with Freeborn's contention that Palco's submission of the landslide study represents a "genuine effort to influence government action" protected from liability as per state law and the U.S. Constitution.

The lawsuit's main prosecutor and its supporters have depicted the Constitutional liability shield as a "right to lie" legal loophole, but in his ruling, Freeborn points out that the law doesn't apply if a company persuades decisions through "improper means" that negatively effect competitors. He also explains that the facts of the case indicate that the incorrect landslide study did not influence the content of the finalized Headwaters Deal, and that the corrected version was properly filed by Palco.

Though Gallegos and his supporters believe the ruling short-circuits justice, both of the judges that have reviewed the various versions of the lawsuit have had strong doubts about its strength. And its dismissal, though possibly the subject of an appeal, will complicate Gallegos' approaching re-election campaign.

Thrown Out

Key to the lawsuit is its claim that Palco tried to bureaucratically bury the corrected study by delivering it to local offices of the California Department of Forestry (CDF) and the North Coast Regional Water Quality Control Board instead of the CDF's main office in Sacramento. Freeborn, however, ruled that the point is moot because state law guarantees "the utmost freedom of access" to judicial and quasi-judicial reviews "without the fear of being harassed by derivative (legal) actions."

The judge concluded that the since the state law shields the original submission from litigation, "the alleged commissions by inaction are meaningless." And he said that he disagrees with the decision of Humboldt Superior Court Judge Christopher Wilson - the case's original judge who voluntarily removed himself because of the DA's concerns about an appearance of bias - which allowed the case to go forward at an early stage despite Wilson's description of it as "a prodigious stretch."

Freeborn said application of the state law should have produced a dismissal when Palco first motioned for one.

The Noerr-Pennington Doctrine also provides immunity, Freeborn added. Beyond that, he questioned the premise of the lawsuit, saying that the Headwaters negotiations involved a wide range of participants and weren't as easily manipulated as the DA alleges.

"The Headwaters Agreement was not some covert, dark of night operation instigated solely by Palco," Freeborn said. He does not believe the submission of the incorrect study is evidence of fraud, saying that other studies from the same consultant hired by Palco were correct. If Palco intended to commit fraud and improperly steer decisions, Freeborn continued, the company would have fudged data in more than one instance.

"This is a single (alleged) act in my estimation," Freeborn said.

And it didn't amount to much, he added. He pointed out that both the incorrect and true study data were submitted after the Nov. 16, 1998 public comment "cut off date," and "the CDF therefore was under no obligation to consider either of them." The corrected study was filed on Jan. 22, 1999, and the DA's lawsuit states that it "never made it up the chain of command."

But Freeborn noted that on Feb. 25, 1999, the CDF adopted a plan with a lower logging limit despite the presence of the incorrect report in the administrative record. "(The DA) alleges that the CDF was deprived of the effect of the 'corrected' report, but if that was the case, plaintiff fails to explain how the CDF arrived at the initial (logging plan) . calling for a reduced scale of logging more consistent with the corrected report."

Additional lobbying by Palco eventually yielded a less restrictive plan that allowed the company to harvest 178 million board feet per year. Freeborn, however, contests the DA's argument that the decision was the outcome of fraudulent conduct. His ruling defines the Regional Water Quality Board, not the CDF, as the source of the request for the Jordan Creek study - and the appropriate recipient of the corrected study.

DA: Lying's Not OK

Though word on an appeal had not come by press time, Gallegos released a statement to the media on June 15, a day after the ruling, that suggests he will challenge the dismissal. In the press release, Gallegos said the ruling "completely insulates Pacific Lumber Company from any liability for lying to the government."

The DA also disagreed that the Noerr-Pennington Doctrine is applicable. He asserted that the law protects political expression, not exchanges with government agencies who issue permits based on the information they receive. "This is an absurd twist on what lobbying is because lobbying is petitioning the government for a change in the law, not for a permit to operate under the law," said Gallegos.

The definition of "lobbying" will be argued if an appeal is filed. Freeborn, however, pointed out in his ruling that Gallegos' lawsuit actually uses the word "lobbying" several times to describe Palco's communication with state agencies. The judge also cites several examples of caselaw, ultimately quoting from a 1998 Supreme Court judgment which holds that "given the sweep of the Noerr-Pennington Doctrine, we have no difficulty in joining our sister circuits to conclude that a lobbying effort designed to influence a state administrative agency's decision . is within the ambit of the doctrine."

Gallegos thinks it's a mistake to apply that in Pacific Lumber's case. "(Freeborn's) decision appears to provide immunity for anyone seeking a permit from a governmental agency - even a building permit," he said.

Finally, the DA said that "this ruling, if allowed to stand, will legitimize lying and penalize honesty."

Going into the end of his first term, Gallegos will have to deal with the political damage of having the suit - a linchpin of his public identity - fail in court. The lawsuit led to an unsuccessful recall attempt, and an appeal of the ruling may be as much a political necessity as a legal one. But Richard Salzman, Gallegos' campaign manager, doesn't think the political price will be as high as some might suppose.

"People are not going to fault Paul because a judge rules that Pacific Lumber has a right to lie," said Salzman. "But it might affect their opinion of the judicial system."

The outcome of the Superior Court proceedings comes at a time when public opinion on Palco and Gallegos has already been firmed, Salzman added. "I don't see this result changing people's opinions on these issues either way," he said.
But Chuck Center, Palco's communications director, said Gallegos has lost credibility as a DA. "It's been our position all along that we would prevail, and we have always said that this has been a frivolous, factless lawsuit," he said. "It's just too bad it took two-and-a-half years to get to this point because there have lots of costs along the way - to the county, and to us. We're hoping the DA will go in a different direction and pay attention to fighting crime."

Center added that if Gallegos decides to file an appeal, negative impact will worsen. "I think everyone in the community wants to leave this behind - us included."