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August 24, 2004

Less complexity, more information

By Richard Painter

Professor Brickman once again makes cogent and well reasoned arguments in favor of the “early offer” proposal. While I am not opposed to that proposal, I am concerned that it will continue to run into political obstacles not just because it is opposed by the plaintiffs’ bar, but because other features undermine its appeal to voters and legislators normally predisposed to favor contingent fee reform. Chief among my concerns are:

* Early offers under the proposal are preceded by a moderately complex early discovery procedure that could itself be the subject of disputes between the parties. Disputes over “early offer” discovery could bog down settlement negotiations and make resolution of tort claims more difficult. These early discovery provisions also make the proposal more difficult for legislators and voters to understand, and make it vulnerable to “what if” questions in which opponents of the proposal demand that its supporters describe what would happen under various scenarios in which early discovery rules are not complied with in letter or spirit. It is important to recognize that the existing system in which many tort claims are settled early, without much discovery or dispute over discovery, saves time and expense. This system arguably should not be changed simply because early discovery allows parties to negotiate settlement on a more informed basis. In any event, the timing of discovery is a separate issue from the reasonableness of legal fees, and the two issues arguably should not be entangled as they are in the early offer proposal.

* Professor Brickman makes compelling arguments that the risk assumed by a plaintiff’s lawyer in litigating a contingency case is directly linked to the amount the defendant is willing to pay to settle the case early on (the higher that amount, the lower the lawyer’s risk). Professor Brickman’s answer is to tie the lawyer’s fee to improvement on this amount as the case moves along after a settlement offer is rejected. While theoretically sound, the problem with this approach is that it allows defendants, by making or not making settlement offers within the framework of the proposal, to determine the size of plaintiffs’ lawyers’ fees. This gives rise to possible collusion between defendants and plaintiffs’ lawyers (e.g. defendants who do not make early settlement offers that trigger the proposal, or who make very low offers, and plaintiffs’ lawyers who return the favor by recommending that their clients accept low settlement offers later on). Linkage between contingent fees and defendants’ settlement posture also makes the proposal politically vulnerable because it injects defendants into plaintiffs’ relationships with their lawyers (opponents will run political ads saying that “when you are injured, under this proposal the other driver’s insurance company, not you, gets to decide how much your lawyer gets paid”). This bolsters claims of those who argue that contingent-fee reform is really about helping defendants rather than helping plaintiffs avoid paying too much to their lawyers.

A few more general observations:

* Contingent fee abuse could be pervasive throughout the plaintiffs’ bar, as Professor Brickman argues, or, as I believe, a serious problem that arises in a relatively small portion of cases and that unfairly inflates the incomes of a relatively small portion of plaintiffs’ lawyers. This debate largely turns on statistics, and I have seen statistics that support each side. I should only point out that most statistics on median incomes of plaintiffs’ lawyers (which I cite in my report for the Manhattan Institute on the New American Rule) do not reveal figures that are particularly shocking or that plaintiffs’ lawyers as a whole are overpaid for the role they perform in our civil justice system. It is, however, telling that some statistics (also cited in my report) show mean incomes for plaintiffs’ lawyers that are significantly higher than the median, meaning that there is a lot of money being made by relatively few lawyers on the high end. Some of this mean/median differential is because some very good lawyers earn a lot (e.g. Corboy & Demetrio), but the mean is also driven up when contingent fees are excessive in a small but significant number of cases, unfairly enriching some lawyers (e.g. Dowd). Regardless of our disagreement over the breadth of the contingent fee abuse problem, Professor Brickman and I agree about its depth and the injury that it does to the reputation of the legal profession.

* If most plaintiffs’ lawyers do in fact make relatively modest incomes, or legislators and voters perceive most plaintiffs’ lawyers to make relatively modest incomes, contingent fee reform will be difficult to accomplish if cast as part of a general attack on plaintiffs’ lawyers’ fees. This is particularly true in today’s environment where corporate lawyers, not plaintiffs’ lawyers, have been characterized as enriching themselves at the public’s expense, and plaintiffs’ lawyers argue that their work is necessary to protect the public. Whether true or not, such arguments have political resonance. My own view is that contingent fee reform does not require a general attack on levels of compensation for the plaintiffs’ bar, and if carefully implemented would not drive down the annual incomes of most plaintiffs’ lawyers. The target is instead a select one: unfair practices that allow some lawyers to take too much money from their clients in some cases. These relatively few lawyers who are unjustly enriched may be politically powerful if they also make large campaign contributions, but they are not necessarily popular. Once it is understood that contingent fee reform would benefit not only plaintiffs but also most lawyers by improving the reputation of their profession, opposition to reform should be easier to overcome.

* Professor Brickman points to a number of factors that may impede fair pricing of contingent fees, but in my view the most salient factor is information asymmetry. Plaintiffs’ lawyers know more than their clients do about the admittedly uncertain factors that determine the reasonableness of a contingent fee: the size of a likely judgment or settlement if a case is successful, the chances of success and the amount of lawyer time likely to be required. The New American Rule addresses this information asymmetry by requiring lawyers to disclose an hourly rate above which their fee will not go. This rule applies regardless of whether the defendant offers to settle the case, keeping the defendant away from the outcome of lawyer-client fee negotiations. The proposal instead allows the plaintiff to decide, after hearing how high the lawyer’s fee could go on a per hour basis, whether to hire that lawyer or a different one. Finally, the proposal cannot possibly be characterized as doing away with contingent fees, except of course those charged by a lawyer who wants fees that would translate into an extraordinarily high amount of money per hour and cannot justify this amount to his client. That lawyer should not be representing the client to begin with.

Once again, the early offer proposal is in many ways a good one, despite its disadvantages. The New American Rule, however, is less complex in its procedural aspects, is not contingent on discovery, involves bilateral negotiations between the plaintiff and the lawyer alone rather than triggering mechanisms controlled by the defendant, and limits contingent fees in all cases, not just those in which a settlement offer is made. For these reasons, the New American Rule also is worthy of serious consideration.

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Attorneys' Fees and Ethics, Politics, Procedure



Published by the Manhattan Institute

The Manhattan Insitute's Center for Legal Policy.