California pays private law firm nearly $600,000 for work on three pandemic-related contracts

Faced with two daunting legal problems over the past year — the COVID-19 pandemic and the bankruptcy of a major California utility, PG&E — the Newsom administration has relied on a single Los Angeles law firm.

That business has been lucrative for the firm, O’Melveny & Myers LLP.

In early March, the law firm signed a $596,000 contract with the California Office of Emergency Services to negotiate three emergency COVID-19 contracts on behalf of the state. Those transactions included leasing two COVID-19 field hospitals and negotiating with the Motel 6 chain to provide rooms for the homeless during the pandemic.

The firm also is representing the state’s interests in PG&E’s Chapter 11 bankruptcy proceedings — at a cost of $700,000 a month. The law firm’s compensation totals $9.5 million so far for its work since February 2019 on PG&E. In February this year, O’Melveny renegotiated its contract to raise its fee from a previous $500,000 a month.

In addition to the PG&E and emergency pandemic-related contracts, O’Melveny has also served as the attorney for the California High-Speed Rail Authority, at a cost of $5 million to that agency.

In most cases, staff attorneys within governmental departments or with the California Department of Justice represent the state in legal matters. But the Newsom administration has relied heavily on O’Melveny to do the state’s legal work — far more than any other law firm in California.

The payment to O’Melveny for its COVID-19 contracting work appears to be the largest payout of taxpayer funds for legal services in the state’s database of more than $3 billion in emergency contracts related to the pandemic.

Under California law, all of O’Melveny’s contracts with the state are exempt from competitive bidding requirements, which do not apply to outside legal services.

Office of Emergency Services spokesman Brian Ferguson said that the $596,000 contract for the three COVID-19 emergency contracts were “for legal services to support the state in negotiating life-saving housing and hospital surge capacity.”

O’Melveny and Myers, founded in 1885 in Los Angeles, is one of the oldest law firms in the state and includes nearly 750 attorneys. Its senior partners have included Warren Christopher, the former U.S. secretary of state, and Richard Riordan, the former mayor of Los Angeles.

In a written statement, O’Melveny said the legal services included negotiating those “complex” transactions. They said they “mobilized a cross-disciplinary team of restructuring, real estate, and health care lawyers to accomplish the goals of the Governor’s Office — and we did so in record time.”

“The transactions we advised on were complex, unique, and urgent,” they said.

In press releases announcing their work for the state, O’Melveny said “we always welcome the opportunity to represent the State of California in matters where our expertise can bring value. And we will proudly do so again if called upon when the State needs our assistance.”

H.D. Palmer, deputy director at the state Department of Finance, said O’Melveny was hired because of the complexity of the PG&E bankruptcy, which involves the state’s interests in assuring stability in the energy market, ratepayers, shareholders, debtors and wildfire victims who have filed claims against the utility.

“Bankruptcy is a highly specialized area of the law, with relatively few practitioners who practice regularly in complex Chapter 11 cases, and PG&E certainly qualifies as a complex case,” Palmer said.

For its work, the state is paying O’Melveny a flat fee instead of the more-common hourly billing rates, the firm and state officials said. Peter Zeughauser, whose firm advises some of the largest law firms in the country on best practices, said a flat fee structure allows for the state to rein in runaway costs

“With the hourly rate, there’s always this incentive to fill hours to make money,” said Zeughauser, who acknowledged law work is expensive regardless. He estimated junior associates could cost roughly $500 per hour and partners around $1,300. If a firm can finish its work sooner than originally anticipated, a flat fee can work in its favor, Zeughauser said.

Mark Toney, whose PG&E watchdog group TURN has a $500,000 monthly budget said the $700,000 in taxpayer money O’Melveny is receiving can be hard to understand in isolation when the stakes are so high.

“The number pales in comparison to what PG&E is paying its bankruptcy attorney’s and financial analysts, about $1.5 billion,” said Toney.

Leases for two surge hospitals

The firm’s state contract for pandemic-related legal services is among a flood of emergency contracts the state has signed as it rushed to equip the state in preparation for a surge of cases.

Those include a $1 billion contract to purchase masks from the Chinese company BYD that has now hit several roadblocks, and a $500,000-a-month agreement to pay the Sacramento Kings to lease the Sleep Train Arena in north Natomas as a field hospital. The Kings recently announced they were forgoing the remaining payment on the arena, which has been mostly unused as a treatment center.

The first pandemic-related contracts that O’Melveny negotiated were two lease agreements with then-bankrupt Verity Health Systems to make available hundreds of additional hospital beds to treat COVID-19 patients. Dr. Patrick Soon-Shiong, who owns The Los Angeles Times, purchased Verity Health in April after the lease was signed.

O’Melveny partner Steve Warren, told the Daily Journal Gov. Gavin Newsom called the firm on March 13 — only nine days after the governor declared a state emergency over COVID-19 — to build “the legal framework to bring the bankrupted hospitals back online.”

Newsom and California health officials believe that California could see a massive surge in coronavirus that would overwhelm hospitals and require more than 20,000 beds to be made available outside the hospital system.

The agreements gave the state access to 266 beds at then-shuttered St. Vincent Medical Center in Los Angeles and 177 beds at Seton Medical Center in Daly City. To lease St. Vincent, the state paid $2.6 million in base rent, plus all expenses, and even its real estate taxes. The facility opened for use on April 13 and ended up seeing few patients.

To lease Seton Medical Center in the Bay Area, the state paid Verity an initial $5 million and between $2.5 million to $3.2 million a month in operating expenses according to San Mateo County Supervisor David Canepa.

Cal Matters reported that through May 18, just 354 patients were treated at Seton Medical Center at a cost of $10.4 million and just 65 patients at the St. Vincent Medical Center at a cost of $15 million. Both surge hospitals will close no later than June 30, officials say.

O’Melveny also represented and negotiated the state’s mid-April agreement with Motel 6, to lease 5,025 rooms “to help protect California’s homeless from COVID-19,” part of its Project Roomkey initiative. The contract and its details were not readily available on the state’s website that publishes COVID-19 related contracts.

The agreement with Motel 6 was part of the Project Roomkey program that has aimed to provide as many as 15,000 rooms for the homeless across the state. Jurisdictions participating in Project Roomkey are eligible for 75 percent reimbursement of associated costs from the Federal Emergency Management Agency. Motel 6 was one of several chains that participated in the project.

A lease agreement between Motel 6 and San Joaquin County obtained by The Bee showed a daily rate per room of $69 “plus taxes and applicable fees.”

“Motel 6 is pleased to support Governor Newsom and the State of California’s efforts to provide assistance during the pandemic, including lodging for our most vulnerable populations and first responders,” said Rob Palleschi, CEO of G6 Hospitality LLC, the owner of the Motel 6 chain.

But weeks after Palleschi’s statement on April 18, the program seemed to be stalling. During protests in San Dimas on May 9, Mayor Emmet Badar said Palleschi called during the protest to say G6 would no longer plan to house the homeless in the city.

On May 19, the Los Angeles Times reported that only half of the 15,000 hotel and motel rooms California has leased for homeless people to slow the spread of coronavirus were occupied.