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Professor Brickman responds

August 19, 2004 6:25 PM

Professor Painter expresses basic agreement with my core thesis but disagrees on a number of issues. Although our areas of agreement far outweigh our disagreements, in this response, I will focus on two areas of disagreement: contingency fee practices and the relative merits of the �early offer� proposal versus the �New American Rule.�

While Professor Painter agrees that there is considerable price gouging by some lawyers, he believes that this is not true for the �vast majority.� I disagree. Contingent fee lawyers routinely charge standard contingency fees even though there is already a settlement offer on the table at the time they begin representation as well as in other cases without meaningful risk. As I indicated in a recent article:

A frequent abuse in personal injury representation occurs when lawyers routinely charge standard contingency fees of one-third or more even though the insurance company has either already offered to pay policy limits to the injured party or claimant before the lawyer was retained or would have offered to do so, if approached, and, in fact did do so after the claimant retained counsel. For example, a former insurance adjuster in Missouri has stated under oath:
From 1962 until January 1, 2002, I was employed by State Farm Insurance Company . . . as an adjuster. . . [and] supervised other adjusters. Over the years I witnessed many examples of attorneys charging their clients (people with a claim against State Farm) a contingency fee of one-third or more when State Farm had already or would have offered to pay that client all that State Farm was obligated to pay under the policy of insurance in force.
Quoted in: Lester Brickman, Effective Hourly Rates of Contingency-Fee Lawyers: Competing Data and Non-Competitive Fees, 81 Wash. U.L.Q. 653, 660-61 (2003).

Price gouging is thus the norm, not the exception. Price gouging and price fixing largely account for the 1400% inflation-adjusted increase in the effective hourly rates of contingency fee lawyers over the past 40 years. See id. at 707. Corboy & Demetrio�s declination to apply their contingency fee to the pre-representation settlement offer was both ethical and honorable--and extremely rare. Mr. Dowd�s action in taking a percentage of the offer that he did nothing to generate is both commonplace and well within the standards that courts and disciplinary agencies apply to contingencies fees. Therein lies the problem. Professor Painter�s observation that the Dowd case is a referral fee problem and not a contingency fee problem is off the mark. Mr. Dowd�s action in taking a percentage of a settlement that he did little or nothing to generate is replicated every day by hundreds of contingency fee lawyers. Professor Painter is certainly correct that what is different about the Dowd matter is that it has attracted some publicity and may yet attract more. Beyond that, however, it is a run-of-the-mill commonplace occurrence � and an indictment of these contingent fee practices.

Of course, I agree with Professor Painter that the Illinois courts� decisions are at best regrettable. To be sure, Illinois courts have been in the forefront of the movement to depreciate clients� fiducial and co-relative ethical rights in favor of the rights of lawyers. See Lester Brickman, The Continuing Assault On the Citadel of Fiduciary Protection: Ethics 2000�s Revision of Model Rule 1.5, 2003 Ill. L. Rev. 1181 (2003). Even so, the Illinois courts� treatment of Mr. Dowd�s claim is consistent with the practices of other courts in other jurisdictions.

�Early Offer� vs. the �New American Rule�

Professor Painter�s proposal is a commendable effort to deal with contingency fee lawyers� price gouging. It is a variant of a proposal I set forth 15 years ago. See Lester Brickman, Contingent Fees Without Contingencies: Hamlet Without The Prince of Denmark?, 37 UCLA L. Rev. 29, 115 (1989). There, I also attempted to empower clients to bargain with contingency fee lawyers over fees. Over the years, however, I came to realize that the impediments to price competition erected by the bar, including ethical rules designed to preclude price competition, were simply too formidable to overcome without more direct intervention. See Lester Brickman, The Market For Contingent Fee-Financed Tort Litigation: Is It Price Competitive?, 25 Cardozo L. Rev. 65 (2003). A summary version of this article is set forth in 27 Regulation 30 (Summer 2004). In light of that insight, I set out, with others, to devise the �early offer� proposal.

Professor Painter criticizes the proposal because it �interferes with market mechanisms more than is necessary.� In my view, the �early offer� proposal replicates the market bargain that would be concluded if consumers of legal services were able to do what businesses and corporations do when they hire lawyers on a contingent fee basis in commercial litigation. In these instances, corporations bargain out terms that identify the underlying value of the claim, agree to a set fee for the legal effort to assert the claim and agree to pay a percentage of any recovery in excess of the agreed upon underlying value of the claim. This is precisely the market bargain that the �early offer� proposal seeks to extend to consumers of legal services.

Professor Painter also identifies as a defect in the �early offer� proposal that it is only triggered if the defendant makes a settlement offer. The latter is true but is this a defect?

Consider the ethical substructure upon which the proposal is constructed. We both agree that lawyers are charging standard contingency fees in cases devoid of meaningful risk and that this is or should be considering unethical. That is, such conduct violates the ethical rule that fees be limited to �reasonable� amounts. In the contingency fee context, I previously established that risk is the ethical underpinning of the ethical validity of contingency fees and that such fees must be commensurate with the risk being undertaken by the lawyer. See Contingent Fees Without Contingencies, id. A contingent fee includes a risk premium for assuming risk. When lawyers charge standard and substantial contingency fees in cases without meaningful risk, they are charging risk premiums though not assuming risk. That is price gouging. But how then to breath life into the dormant ethical rule that lawyers cannot charge risk premiums if they are not assuming any remotely commensurate risk?

The practical problem this poses is how to measure the existence of risk without creating a bureaucratic structure or imposing new burdens on judges who already shirk their responsibility to apply ethical rules to lawyer�s fees. The �early offer� proposal presents an elegant solution to this conundrum. It identifies as a marker of the absence of risk, the amount, if any, offered by an allegedly responsible party to settle a tort claim, before any substantial value adding efforts have been contributed by the lawyer. Against such amounts offered in settlement, the lawyer may not charge a risk premium.

Thus, the �early offer� proposal depends upon a marketplace assessment of the underlying value of a tort claim by an allegedly responsible party putting its money on the line. That decision, however, is guided by the same invisible hand that �regulates� competitive markets: self-interest. Consider the financial incentives that motivate an allegedly responsible party to make an early offer of settlement.

Allegedly responsible parties will only make early settlement offers if they believe that they will likely be found liable for an injury suffered by the claimant. Currently, because of the time value of money and for other reasons, such parties have financial incentives to delay paying claims until the last possible moment. This raises transaction costs and lowers efficiency.

The �early offer� proposal changes those incentives as follows:

1) It allows allegedly responsible parties to offer settlements in dollars worth 90-95 cents versus the current value of such settlement offers to claimants of 66 2/3 cent dollars. They will allow both lower settlement costs and higher in-pocket receipts for claimants.

2) It allows allegedly responsible parties to save on defense costs which consume a formidable 14% of the total amounts spent by defendants and their insurers for tort claim costs.

3) It allows allegedly responsible parties to avoid medical costs �build-up� which amounts to tens of billions of dollars a year in inflated and fraudulent medical care costs incurred by tort claimants. Under contingency fee �math,� each $1 in medical care costs incurred by a claimant generates $1 in legal fees for the contingent fee lawyer. (For an explanation of this process, see Effective Hourly Rates, id. at 673-74). It is because of contingency fee �math� that someone who suffers a weight-bearing bone break in an automobile accident will incur $14,165, mostly in medical care costs, compared to $5,228 in such costs incurred by someone identically injured, who does not hire a lawyer to press her claim.

To avoid such medical care cost �build up,� and to realize the other savings identified, allegedly responsible parties have an financial incentive to make early settlement offers that are sufficiently substantial to gain acceptance. This will lead to earlier settlements and considerably lowered transaction costs.

To be sure, the �early offer� proposal will prove costly to constituencies that own shares in Litigation, Inc., including: plaintiff lawyers, defense lawyers, doctors, chiropractors, expert witnesses, court reporters and process servers. Indeed, the only group that will benefit is consumers through lowered insurance and product costs.

One final point is Professor Painter�s assertion that political arguments weigh in favor of the �New American Rule� over the �early offer� proposal.

Unlike most tort reform proposals, �early offer� is not susceptible to the sound bite-sized criticism that the proposal takes away victims� rights to seek redress from the courts for their injuries. �Early offer,� instead of playing the �take away� game, is designed to protect consumers of legal services from price gouging by lawyers. It is for this reason that Ralph Nader, in referring to a variant of the �early offer� proposal that was on the California ballot, termed the proposal �diabolical.�

The essence of the �New American Rule� is that consumers of legal services get to choose, at the conclusion of their representation, whether to pay a contingency fee or an hourly rate fee instead. Lawyers will claim that the proposal is a Trojan Horse designed to do away with contingency fees � the poor man�s �key to the court house.�

I will leave it to readers of this discussion to determine which proposal wins the �political� debate.

 

 

 

FEATURED DISCUSSION ARCHIVE:


Obamacare Decision: Reactions, July 2012
Law School Faculty Diversity, May-June 2012
Class Actions, May 2012
Constitutionality of Individual Mandate, March 2012
Human Rights and International Law, February-March 2012
The constitutionality of President Obama's recess appointments, January 2012
Do caps on medical malpractice damages hurt consumers?, December 2011
Trial Lawyers Inc.: State Attorneys General, October 2011
Wal-Mart v. Dukes, April 2011
Kagan Supreme Court nomination, May-June 2010
Election roundtable, November-December 2006
Who's the boss, September 2006
Medical judgement, July 2006
Lawyer Licensing, May 2006
Contingent claims, April 2006
Smoking guns, July 2004

Isaac Gorodetski
Project Manager,
Center for Legal Policy at the
Manhattan Institute
igorodetski@manhattan-institute.org

Katherine Lazarski
Press Officer,
Manhattan Institute
klazarski@manhattan-institute.org

Published by the Manhattan Institute

The Manhattan Insitute's Center for Legal Policy.