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On fees and markets

August 18, 2004 3:54 PM

Professor Brickman makes several very good points, and his proposal to link contingent fees to the work that lawyers actually do for their clients to improve upon settlement offers, is theoretically sound. I am concerned, however, about how his proposal might work in practice, and more importantly that his proposal might never get implemented because voters and legislators believe it to be too complex and to interfere too much with lawyer and client autonomy. I thus suggest below that an alternative proposal, the so called �New American Rule�, be considered as well.

A few general observations:

1. We should not go overboard in our criticism of price gouging by the plaintiffs� bar. Personal injury lawyers serve a useful purpose when they loyally and competently represent their clients, as I believe most do. The vast majority of personal injury lawyers also do not earn outrageously high fees when their annual incomes are measured as a whole. In many communities, lawyers representing businesses and other defendants earn as much as, and sometimes more than, their counterparts in the plaintiffs� bar.

2. There is, however, considerable price gouging by some (by no means all) plaintiffs� lawyers. The tobacco lawyers who sought fees running into the billions of dollars from Texas, Florida, Massachusetts and other states because of �arm�s length� contingent fee contracts they entered into with state attorney general�s offices (or more accurately in some cases with their friends in state attorney general�s offices) are the most blatant example of price gouging at the public�s expense. Contingent fee lawyers who demand hundreds of thousands of dollars from individual plaintiffs for doing little or no work (e.g. attorney Dowd in the Corcoran case) are also abusing the public trust (as Corboy & Demetrio recognized when it voluntarily waived its fee in that case even though it did considerably more work for Corcoron than Dowd had done, but nonetheless without improving upon the settlement offer that Corcoron had before her attorneys got involved).

3. To the extent possible, the market should be allowed to solve the contingent-fee-abuse problem itself, free of regulatory interference. This is why I suggested in a 1995 law review article that the answer might be less regulation not more. See Richard W. Painter, Litigating on a Contingency: A Monopoly of Champions or a Market for Champerty?, 70 Chicago Kent Law Review 625 (1995) (Symposium on Fee Shifting). The contingent fee I argued is in essence a form of champerty that lawyers are allowed to provide for their clients, while traditional prohibitions on champerty prevent non-lawyers from funding and insuring lawsuits (with some exceptions). Allowing third-party insurers to offer the same champertous product that is embodied in the contingent fee (litigation insurance and financing) in return for a portion of any judgment might help some clients hire hourly rate lawyers and, where contingent fees are excessive, drive those fees down to more reasonable levels. There has since been some experimentation with such arrangements in jurisdictions that allow them, but for the most part only with advances against plaintiffs� awards on appeal. Furthermore, ethical standards in the litigation financing industry, and its reputation, will have to improve substantially before it becomes a realistic competitor with contingent fee arrangements offered by the plaintiff�s bar.

4. Even when lawyers still dominate the market for litigation financing and insurance (the essential services being offered with a contingent fee), existing market mechanisms work sometimes. This is exactly what happened with respect to 60% of the fee in the Corcoron case, which was waived. Corboy & Demetrio is one of the most well respected plaintiffs� law firms in the country and has far more to lose by way of reputation than it has to gain by taking fees from Ms. Corcoron on the basis of a dubious contractual claim. Other potential clients having more lucrative claims than hers might be deterred from going to Corboy & Demetrio if they heard that the firm had charged her a �contingent� fee without getting her a penny more than she had before she talked to her lawyers. The firm�s economic interests, and its partners� social and professional reputations, dictated that the firm should do the right thing, which it did.

5. The question in that case then is how to deal with the other 40% and Mr. Dowd. The market itself may help here as well. Enough publicity surrounding this incident could make this one of the most costly fees Mr. Dowd has ever earned (unless people in Des Plaines really enjoy the prospect of paying a lawyer for doing no work). Furthermore, contract law should have come to the aid of Ms. Corcoron. The Illinois courts simply got this one wrong, because fee reasonableness (required under Rule 1.6) is an implied-in-fact covenant in any contract between a lawyer and a client (as are other rules of professional ethics). In many jurisdictions, a lawyer who practice law unethically for a client has no right to be paid at all, and at a minimum a lawyer should be held to his end of the bargain when he contractually obligates himself to practice law according to rules of professional responsibility (including the rule that a fee must be �reasonable� in relation to, among other factors, the work done by the lawyer for the client). Finally, the Corcoron case illustrates a subset of abuses arising out of referral fees (which normally are paid to attorneys who do little or no work on a case) rather than out of contingent fees as a whole. This problem could be addressed with narrowly tailored measures, for example an amendment to state ethics rules providing that a referring lawyer shall not receive an amount in excess of the amount actually collected from the client by the lawyer doing the majority of the work on a case. Under such a rule, Corboy & Demetrio�s determination of its ethical obligations (and of its contractual rights) would have been binding on Dowd as well.

6. The �early offer� proposal designed by Lester Brickman, Michael Morowitz and Jeffrey O�Connell is a good one (so good as to receive praise from former Harvard President Derek Bok and Judge John T. Noonan, Jr. in forwards to the 1994 Manhattan Institute publication). The proposal is, however, complex in its procedural aspects because of the discovery rights that its authors rightly perceive to be a necessary precondition to an �early offer� being meaningful. Collateral litigation between plaintiff and defendant over pre-offer discovery could make the tort system more rather than less expensive for all concerned. The proposal also interferes with market mechanisms perhaps more than is necessary to address the underlying problem (excessive contingent fees charged by lawyers who do little or no work for a client). The proposal also does not address other related problems (such as the tobacco lawyers and other lawyers who do a lot of work but still charge an effective hourly rate far in excess of that which is reasonable � in some cases in excess of $20,000 per hour). Finally, the bulk of the �early offer� proposal�s rules are not triggered at all unless the defendant makes a settlement offer, which puts the defendant in the unique position of being able to determine through its own settlement strategy the ethical obligations of the plaintiff�s lawyer to the plaintiff. A proposal that was more independent of a triggering mechanism controlled by the defendant might better withstand political arguments that contingent-fee reform is more about protecting defendants from plaintiffs� lawyers than it is about protecting plaintiffs themselves.

I will now make a few observations about the alternative �New American Rule� for contingent fees that I drafted with Jim Wooton and then analyzed in a 2000 publication for the Manhattan Institution (see Richard W. Painter, The New American Rule: A First Amendment to the Client�s Bill of Rights, 2000 Civil Justice Report (Manhattan Institute 2000) ):

1. We call our proposal the �New American Rule� because we believe it would be a useful corollary to a unique aspect of the American justice system that supposedly improves access to the courts: the contingent fee. The contingent fee is banned in most other countries but helps ordinary plaintiffs sue without fear of being stuck with large lawyers� bills if they lose (another uniquely American rule that supposedly helps impecunious litigants is the rule that losing parties do not have to pay the other party�s legal fees, which contrasts with the �loser pays� approach followed in many other countries). Our intent with the New American Rule is to assure that, while plaintiffs lawyers are allowed to charge their clients a premium above a normal hourly rate for the risk they assume with a contingent fee instead of an hourly fee, this premium will be disclosed to the client in terms that the client can most easily compare with the hourly rate that they otherwise would have to pay if the fee were not contingent.

2. In essence, the New American rule requires the lawyer charging a contingent fee to say to the client in advance that �my fee will be X% of any judgment or settlement in this case but will be no higher than Y dollars per hour.� Under the proposal, the lawyer and client are free to agree on any numbers for X and Y that they want (subject of course to the existing provision in ethics rules and thus implied in the retainer agreement that a lawyer�s fees must ultimately be reasonable). X and Y have nothing to do with whether there is a settlement offer in the case or any other decision made by the defendant. Instead, these numbers are determined by what plaintiffs will pay in a market for legal services that is unregulated except for the requirement that the lawyer who chooses to charge on a contingency must specify both X and Y. After the case is over, the client has the option of paying the lower of X or Y.

3. Of course a lawyer can �evade� the rule by choosing a ridiculously high number for Y. Plaintiffs who are told by their lawyer that Y is $10,000 per hour (or higher), however, should know that something is wrong (they will know enough to look for another lawyer, even if they don�t� know the details -- for example that within minutes of their leaving a lawyer�s office their �complex case that will require a lot of hard work� may instead be settled with a quick call to the insurance company) . The purpose of the rule is to force the lawyer in fee negotiations to signal to the client something about the lawyer�s estimate of the strength of his own hand, thus leveling the information gap between lawyer and client concerning the admittedly uncertain factors that determine a reasonable contingent fee (the size of the client�s claim, the probability of success and the amount of lawyer work likely required). Instead of being told that X is 33% or 40% simply because that is the �industry standard�, the client will at least get a hint as to what the lawyer actually thinks about important aspects of the client�s case, and about what the lawyer will do for the client, when the lawyer names his number for Y.

4. The New American Rule imposes some regulation on the market for lawyer�s fees (it requires the lawyer to choose a number Y that, unless extraordinarily high, could in some cases cap his percentage fee X). The interference with market mechanisms, however, is minimal, particularly compared with the �early offer� proposal, which allows an agreed upon contingent fee percentage X to be applied only to a portion of the client�s judgment or settlement amount that is itself determined not by the autonomous decisions of the lawyer or client, but by the size of an early settlement offer from the defendant.

5. Finally, I will suggest two useful corollaries for the New American Rule. First, because contingent fees are designed for clients of limited means, large governmental entities (such a states seeking to sue tobacco companies or gun manufacturers) should not hire contingent-fee lawyers at all (they can self insure against the risk of losing by paying an hourly rate, just as governmental entities usually self insure against a host of other losses � including negligence lawsuits brought against them by plaintiffs� lawyers) . The game in which officials in some states passed contingent-fee business on to their friends, and lawyers sought billions of dollars in fees arguing that these arrangements constituted �freedom of contract� would, under this new restriction come to an end. Second, courts should take more seriously ethics rules requiring that a lawyer�s fee be �reasonable.� Courts should also recognize that clients like Ms. Corcoron, when they hire lawyers, do so with the understanding that, when their case is over, the fee charged will in fact be reasonable in view of such factors as the risk involved, the size of their recovery and the amount of lawyer work involved.

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Rafael Mangual
Project Manager,
Legal Policy

Katherine Lazarski
Manhattan Institute

Published by the Manhattan Institute

The Manhattan Insitute's Center for Legal Policy.