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Contingency fees: format, links down

August 17, 2004 10:52 AM

Our second Featured Discussion brings together two of the nation's leading experts on legal ethics, Lester Brickman and Richard Painter, to discuss potential ways to improve the legal system through reforming the way lawyers charge contingency fees. For a fuller introduction to their views, see my entry on the main forum page.

Also, in contrast to the usual weblog format, new entries in this Featured Discussion are posted at the bottom rather than the top of the page. So scroll down. Thanks!

Table of contents of the discussion: August 17 Brickman; August 18 Painter; August 19 Brickman; August 20 Painter; August 26 Brickman.

Over the past forty years, the scope of liability assessed under the aegis of the tort system has greatly expanded. This expansion has been driven by the substantially increasing yield from contingent fees realized by plaintiff lawyers. Since 1960, the effective hourly rates of tort lawyers have increased 1000% to 1400% (in inflation-adjusted dollars), while the overall risk of nonrecovery has remained essentially constant though it has decreased materially for such high end tort categories as products liability and medical malpractice.

These enormous increases in contingency fees have occurred despite the existence of regulatory regimes that ostensibly apply to such fees. Under both ethical codes and fiduciary principles, fees must be reasonable. Contingency fees are designed to and do yield higher effective hourly rates than do hourly rate fees to reflect the risks that lawyers bear. These higher rates of return, however, are justified under ethical codes and fiduciary principles only if they are commensurate with the risks assumed by lawyers of non-recovery or low recovery. The need for such doctrinal protection has long been manifest because clients being charged contingency fees in personal injury cases are highly susceptible to lawyers� overreaching.

Ethical and fiducial protections for personal injury clients have failed to accomplish their essential purpose. By pursuing anticompetitive strategies including erecting barriers to competition from outside the profession and promulgating ethical rules restricting price competition within the profession, contingent fee lawyers have not only flouted ethical rules and fiducial protections but have imposed substantial rents on tort claimants as the price for tort claiming. These rents, which often translate into effective hourly rates of thousands and even tens of thousands of dollars an hour, are the product of lawyers� collusive efforts in maintaining uniform pricing: standard contingent fees in virtually all personal injury litigation, ranging from 33 to 50% in various jurisdictions.

The hallmark of the gross overcharging that permeates contingency fee practice is the zero-based accounting system that plaintiff lawyers impose. When a client hires a lawyer to process a tort claim, the lawyer assigns the initial value of the claim as zero. Even if the case is a �no brainer� and a multi-million dollar settlement is a virtual absolute certainty as, for example, if a doctor amputates the wrong limb or operates on the wrong side of the patient�s brain, or engages in other equally impactuous acts of egregious medical malpractice, a standard contingency fee is charged and it applies not only to the value added to the claim by the lawyer but to the value of the entire claim, irrespective of the fact that the claim already had substantial value at the time the client hired the lawyer. As one leading ethics expert has explained:

We permit contingent fees to be larger than what would constitute a reasonable hourly fee because the lawyer takes the chance, if the contingency does not occur, of going uncompensated. But most personal injury cases have some value. Prospective defendants are often willing to pay something to resolve them. Why should the plaintiff�s lawyer get a full contingent fee for �recovering� this amount?

Stephen Gillers, REGULATION OF LAWYERS: PROBLEMS OF LAW AND ETHICS, 154 (4th ed. 1995). See also Kenseth v. Com�r of Int. Revenue, 114 U.S. Tax Ct. Rep. 399 (2000) (stating that the fact that a contingency fee attorney agrees to represent a client on a contingent basis indicates that the cause of action �had value in the very beginning.� Id. at 413).

The zero-sum accounting scam perpetrated by the contingency fee bar is on vivid display in the August 2004 edition of The American Lawyer. Professor Stephen Lubet describes the unfortunate encounter of a woman, Mary Corcoran, with the contingency fee system, nothing that �it begins in tragedy and ends in frustration.� Her husband has been struck and killed by a railroad train while working for the railroad. As reported by Professor Lubet:

Shortly after the accident, Mary was contacted by a representative of the railroad, who wanted her to settle out of court. Negotiating on her own behalf, Mary eventually obtained an offer of slightly more than $1.4 million, at which point she decided to see if any attorney could do better for her. That surely seemed like a sensible decision at the time, although it would end up backfiring badly.

A friend of Corcoran�s introduced her to a lawyer named Joseph Dowd, a solo practitioner in suburban Des Plaines, Illinois, who lists his practice areas as bankruptcy, divorce, and real estate. Dowd spoke to Corcoran about the accident and told her that she needed a personal injury lawyer. She replied that she was interested in retaining Corboy & Demetrio [one of the top personal injury firms in Chicago] because her father knew Philip Corboy from high school. Apparently impressed by her choice, Dowd arranged a meeting with Thomas Demetrio, and Corcoran eventually signed a contingent fee contract. She agreed to pay the firm �25 percent of any sum recovered from settlement or judgment,� and also consented to a referral fee for Dowd in the amount of �40 percent of the attorneys� fees.�. . .

After nearly two years of litigation, the Corboy & Demetrio lawyers came to the conclusion that they could not improve on Union Pacific�s offer-so they recommended that Mary accept the $1.4 million, which had been held open by the railroad. Because they hadn�t gotten an increased offer, Corboy & Demetrio voluntarily waived any fee.

Not so Joe Dowd. He demanded payment of the referral fee-$140,000-even though the litigation firm had waived its fee. By his own admission, Dowd was not an experienced personal injury lawyer, and he had not actively participated in the litigation on Mary Corcoran behalf. Nonetheless, he insisted, a contract is a contract and he wanted his 140 grand. . . .

Most people, including most lawyers, might suppose that $140,000 is an unreasonable amount for attending several meetings, reading a file, and making some phone calls-which pretty much describes Joe Dowd�s work for Mary Corcoran. Incredibly, however, the judge agreed with Dowd. The fee agreement would be enforced as written, end of discussion.

Mary Corcoran appealed, represented by a Chicago lawyer named Christopher Hurley. Once again, the judicial system disappointed her. The appellate court ruled that Dowd had a contractual right to payment, even though neither he nor Corboy & Demetrio had obtained an increase in the railroad�s offer. If Mary wanted an �improvement� clause, the court held, she should have asked for one. But that ignored the fact that she was depending on the lawyers to draft the contract and protect her interests. Still, the Illinois Supreme Court refused to hear the case, so Joe Dowd got his money.

Mary Corcoran�s unfortunate experience with the contingency fee system is the rule not the exception. As a rule, contingency fee lawyers not only charge fees against settlement offers previously obtained, but also routinely charge standard contingency fees in cases where they know at the outset that there is no meaningful litigation risk and that little work will need to be required to produce a settlement. Each year, I receive a few dozen phone calls from clients in circumstances similar to Corcoran�s who have been mulcted by their lawyers. [For an account of these telephone calls, see 81 Wash. Un. L.Q. 653 at 660 n. 14 (2003).] They are further dismayed to learn, like Mary Corcoran, that they have no recourse (though Mary at least found a lawyer to litigate her claim against her lawyer � a rarity). These clients have been cheated by their lawyers and the legal system.

Responding to this need for consumer protection, Professor Jeffrey O�Connell of the University of Virginia Law School, Michael Horowitz, then with the Manhattan Institute and currently with the Hudson Institute and myself designed the �early offer� proposal, to protect Mary Corcoran and others from fee-gouging lawyers. It emulates the market bargain that Mary Corcoran would have attained if she were a sophisticated user of legal services or if her lawyer had not breached his fiduciary obligation to his client by failing to advise her what a second lawyer would have advised Mary if she had gone to that lawyer for legal assistance in negotiating a fee contract with Dowd: to negotiate a contract in which Dowd and others would receive a percentage of what they obtained for Mary over and above the $140,000 offer that she had in hand; that is, to confine their fee percentage to the value that they added to the claim. The proposal, which is designed to be self-effectuating, require no additional bureaucracy for its enforcement, and impose no significant transaction costs, has received extensive coverage in both the media and professional responsibility casebooks. It provides:

1. Contingency fees may not be charged against settlement offers made prior to plaintiffs� retention of counsel.

2. All defendants are given an opportunity to make settlement offers covered by the proposal, but no later than 60 days from the receipt of a notice of claim from plaintiffs� counsel. If the offer is accepted by the plaintiff, counsel fees are limited to hourly rate charges and are capped at 10% of the first $100,000 of the offer and 5% of any greater amounts.

3. Notices of claim submitted by plaintiffs� counsel are required to include basic, routinely discoverable information designed to assist defendants in evaluating plaintiff claims. In turn, to assist plaintiffs in evaluating defendants� offers, discoverable material in the defendant�s possession concerning the alleged injury upon which the defendant relied in making his offer of settlement must be made available to plaintiffs for a settlement offer to be effective.

4. When plaintiffs reject defendants� early offers, contingency fees may only be charged against net recoveries in excess of such offers.

5. If no offer is made within the 60 day period, contingency fee contracts are unaffected by the proposal.

Thus, the proposal would prohibit plaintiff lawyers in personal injury cases from charging standard contingency fees where alleged responsible parties made early settlement offers before the lawyer added any significant value to the claim. Instead, the lawyer would be restricted to charging an hourly rate fee for the effort required to assemble and notify the allegedly responsible party of the relevant details of the claim. If an early settlement offer were rejected and a subsequent settlement or judgment was obtained, the lawyer would apply a contingent percentage to the amount in excess of the early offer. Critics of the proposal, who have frequently mischaracterized it, have failed to comprehend how it counteracts the ethically challenged if not outright fraudulent zero-based accounting system used by contingent-fee lawyers. In fact, by confining application of the contingent fee to the value that a lawyer has added to a claim, the proposal implements the ethical requirements set forth in Rule 1.5(a)(8) of the Model Rules of Professional Conduct and DR2-106 (B)(8) of the Model Rules of Professional Responsibility requiring that contingent fees be commensurate with risk.

On fees and markets

August 18, 2004 3:54 PM | No Comments

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.

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.

Less complexity, more information

August 24, 2004 9:30 AM

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.

A brief rejoinder

August 26, 2004 11:39 AM

I think Professor Painter and I have covered most of the salient points. I offer only a brief rejoinder to three of Professor Painter�s arguments in his latest response.

1. Professor Painter identifies as a defect of the �early offer� proposal that alleged responsible parties (�ARPs�) may make �very low [settlement] offers.� The fact is true but not the characterization. The �early offer� proposal has a built-in self-effectuating mechanism to discourage defendants from gaming the system by making a �very low� settlement offer. If an ARP makes a derisorily low settlement offer in order to reduce the fee that the plaintiff lawyer will ultimately receive, this will deprive the ARP of the financial benefits made available by the proposal. Self-interest dictates that when ARPs believe that they will ultimately have to compensate the plaintiff, they will make settlement offers that are calculated to be sufficient (but not more) to deprive the plaintiff�s attorney of the incentive to go forward and continue the litigation through trial if necessary. If the ARP fails to make a sufficient early offer and it is turned down, it loses most of the benefits that the �early offer� proposal offers, including substantial savings on medical care cost �build up� and defense costs. To be sure, the sufficiency incentive already exists in tort litigation where the dominant determinant of whether a plaintiff will accept a settlement offer is usually plaintiff lawyer�s self-interest. What the �early offer� proposal does is move up the timing of such a settlement offer from much later to near the very beginning of the claiming process because of the benefits that an ARP can realize for doing so. The effect is to significantly reduce transaction costs.

2. Professor Painter again cites to statistics on tort lawyers� income which he says belies the level of windfall fees that I indicate are commonplace. I have devoted an entire article to the subject. See Effectively Hourly Rates of Contingency Fee Lawyers: Competing Data And Non-Competitive Fees, 81 Wash. U.L.Q. 653 (2003). In that article, I conclude that the leading data on tort lawyers� earnings ranges from the trivial to the unreliable to the unrepresentative. The Manhattan Institute has published a study, Trial Lawyers, Inc., concluding that tort lawyers� gross $40 billion a year in revenues. A significant percentage of this revenue is in the form of windfall fees as I have explained previously. Effective hourly rates of tort lawyers range from $350 in auto tort claiming to multiples of that in product liability, medical malpractice and other specialty areas. A top echelon of tort lawyers commands effective hourly rates of $5,000 - $10,000.

3. With regard to the political context, it is interesting to note that in survey after survey, the American public, by wide margins, believes that lawyers charge too much. If the political merits of the respective proposals are compared, there is compelling reason to believe that a proposal that seeks to curb unethical price gouging by lawyers would be overwhelming endorsed by the electorate.

A final note. The �early offer� proposal has been widely reported in the media and is discussed in most legal ethics casebooks. Professor Painter�s New American Rule is also worthy of serious consideration and hopefully will also come to gain such attention.

Justice(s) for Sale

January 12, 2005 11:49 AM

Dear David,

My research shows that the average award against out-of-state defendants is much higher in states that select their judges using partisan elections.  In principle, this could be because the average partisan-elected judge is biased but I agree with you that most judges are not biased regardless of how they are selected.  Thus, it must be that a minority of judges in partisan-elected states are heavily biased.   

Indeed, there is some evidence for this in the data - the partisan bias gets larger when attention is focused on cases with the highest awards.  The idea also makes a lot of sense from a lawyer's point of view - why buy more justice(s) than you need?  Instead, buy one or two and do everything you can to make sure that your big cases end up in those courts.  Forum shopping so that you can buy in your own store. 

We are here to talk about judicial selection systems but some of my other research shows that awards are much higher in counties with a lot of minority poverty.  Here then is lawyer alchemy: take one part partisan-elected judges, add one part poor minority-dominated jury, mix with campaign donations, some local charitable work and a colorful lawyer and, voila!, lead cases turn into gold.  It's no wonder that Alabama has traditionally been a tort hell.  (See here for an example of a master alchemist in action and here for another description of the "magic jurisdiction".)

Although I think these factors drive some outrageous awards I also think that legal doctrine and culture provide the atmosphere in which such awards become possible.  It's easier for a judge and jury to grant large awards when strict liability is the norm and multi-billion dollar cases are not uncommon than when negligence is the standard and when a ten million dollar case is still considered big.  Change legal doctrine and some of the factors that I have pointed to will become more benign.

As you point out, the states rarely change their judicial selection mechanisms, although there has been a slow but steady move towards the so-called merit plan, appointment by the governor from a slate of candidates approved by the local bar or other commission.  I see more possibility, however, in moving cases to the Federal courts.

The Class Action Fairness Act, for example, would make it harder for plaintiff's lawyers to keep large cases involving citizens from different states in small, state courts where they have a big home-court advantage.  It would also make it more difficult for plaintiff's lawyers to extort a payoff from the defendant in return for dropping the threat of big plaintiff claims.  (Like most Americans I have been dragged into a number of such cases.) Although am not overwhelmed by these somewhat crude attempts to modify the system - I would prefer a return to common-sense law - but at present I think such changes would be an improvement.

What do you think?



The Contingent Fee Distraction

April 10, 2006 11:47 AM

Jim, we agree about a lot in Judge and Jury: American Tort law on Trial but agreement is boring so I'm glad that we will focus on one area of disagreement, contingent fees (or, as you say, contingency fees. See, we can't even agree on what to call them!)

Briefly, I think that contingent fees are not a driving force behind problems in the tort system and capping them could have serious unintended consequences.

First, contingent fees have been around for well over a hundred years - thus they cannot be responsible for problems in the tort system that have developed over the past several decades.

Second, tort reformers are usually respectful of markets and private contracts. Indeed, they rightly point to the death of contract (some say it was murder!) as a cause of current problems. Yet when it comes to private contracting between a lawyer and her client, regulation is now in order. That inconsistency bothers me.

If a lawyer and her client want to contract in Lira what business is it of the state to interfere? If the lawyer and client agree on an incentive plan, why should that be regulated? Do we want to regulate contingent fees in other areas? A money-back guarantee, for example, is a contingent fee - you pay only if the product is a winner. A tip is a contingent fee - you pay only if the service was good.

True, not all contracts should be respected - we don't enforce contracts against the public interest - nevertheless, my spider-sense starts to tingle whenever reformers of any stripe try to abrogate private contracting.

It should now be clear that I am not against regulating fees, contingent or otherwise, in class action suits. In class action suits there is no private contract between a lawyer and client. It's all lawyer and that is a recipe for abuse. The type of contingent fee restrictions that have been passed and that Helland and I analyze in Judge and Jury, however, are not restricted to class action cases.

Contingent fees have some good qualities, some of which you have already mentioned. Contingent fees allow injured but cash-poor individuals access to the legal system, they spread risk from plaintiffs to lawyers, and they act as an incentive system for lawyers who would otherwise be difficult for clients to monitor.

It's the last point which explains why restrictions on contingent fees can actually increase the number of frivolous lawsuits. A lawyer paid by the hour is paid regardless of whether the case has merit. But a lawyer paid by contingent fee is paid only if the legal system agrees that the case has merit. As a result, lawyers paid by contingent fee will screen cases more closely than those who are paid by the hour - thus doing the legal system a favor. More on that later.

You are correct that a lawyer on contingent fee may have an incentive to take on some cases that have a low probability of winning but high damages if they do win. But the lawyer's client has exactly the same incentives (indeed, given a contingent fee of 1/3rd, twice as strong incentives!) Thus the argument must be that these cases will go to court with contingent fees but not without them. But why would this happen? Only because clients wouldn't have the cash to take these cases to court - thus we are asking liquidity constraints to do our tort reform for us. I don't like tort reform by the back door.

Not all low-probability, high damages cases lack merit. Nor will capping contingent fees prevent all low-probability, high-damages cases from accessing the courts - only the low-probability, high damages cases where the client can't fund the case in some other way will be stopped. Can we be so sure that clients with little cash are the real danger?

Capping contingent fees is a blunt weapon and I am not at all confident that it hits the right people or hits enough of them to justify the hits that others must take.

Tort reform should aim more directly at the true source of problems in our current system namely judges, juries, and the law.


Your comments are typically thoughtful and lucid. I have so much to say, so I'm going to start with a very basic reaction to your post. I'll then post later today with more detailed thoughts about the empirical evidence you and Eric put together on this issue.

First, again, I'd like to emphasize where we do agree: that fee regulation is not inappropriate for class actions. That concession is actually a major step in the right direction. Class actions are a particular problem in that low probability claims very regularly have fairly high expected returns for the plaintiffs' attorneys working on a contingency fee merely due to the size of the class. As you note, in no way can we say that class members are actually able to negotiate at arms' length for fee contracts, since they're automatically in the class unless they choose to opt out. The lawyers drive the process. Securities class action lawyer Bill Lerach has noted that his legal practice is "the best" since it has "no clients."

I wonder if you'd also extend that position to mass tort claims? There, plaintiffs aren't automatically in the class, so you could say there's (in theory) some fee negotiation. But plaintiffs' attorneys advertise aggressively to pull together thousands of claims. Often, such claims wind up being manufactured. Courts are flooded. Again, the contingent fee is the primary driver in these cases because the aggregate nature of the claims makes speculative cases much more valuable. Television, internet, and radio advertisements trolling for clients wouldn't be nearly so effective if the clients weren't told "you pay nothing unless you win."

Taking television advertising as an entry point, let's look at why I don't buy your argument that contingency fees "have been around for well over a hundred years -- thus they cannot be responsible for problems in the tort system that have developed over the past several decades." Yes, contingent fees -- like the "American rule," like civil juries, like elected judges, like so many other features of American law -- are deeply rooted. But it simply does not follow that such entrenched features of our legal system are not related to the litigation explosion merely because they've been around a long time; it only follows that such features are not solely responsible. 100 years ago, there were no aggregate claims like today's class actions and mass torts; tort claims were much more restricted by substance and procedure (indeed, there wasn't any products liability law to speak of -- see Richard Epstein's discussion of the evolution of products liability law here); federal courts weren't bound to apply state law under Erie v. Tompkins; transportation costs were much higher (making forum shopping much more difficult); there was no television, radio, and internet; and attorneys were not permitted to advertise.

The real question is whether any of these changes, interacting with deeply rooted features of American law (like the contingency fee, no fee-shifting, elected judges, civil juries, federalism, etc.), have contributed to the increase in litigation costs. My claim is yes. And it's not because the changes are necessarily all bad; rather, we may need to look at the long-standing rules as well. For instance, a free speech purist like myself agrees with the Supreme Court that attorneys have the right to advertise commercially. But there's no question that such a right changes attorney behavior. When attorneys can aggregate mass tort claims on a contingent fee, the payoffs are huge. Folks who may or may not be sick are happy to sign up when there are "no fees unless we win."

Private Contracts and Contingent Fees

I, like you, am generally a big fan of private contracting. But "spider-sense" isn't infallible, at least in those of us who can't climb walls. So, here too, I want to take issue with a couple of points.

I think it's important to remember that contingency plaintiffs, in general, are not only liquidity constrained but relatively unsophisticated. Yes, that's one reason contingency fees can be useful: when lawyers are only paid if they win, it pays them to be careful about the cases they take and to be cautious about rejecting settlement and proceeding to trial. But the "screening function" in which the lawyer evaluates the merits of the case cuts both ways. Because an unsophisticated plaintiff is unable to evaluate the merits of his case, he has no idea if, for instance, it's a "slam dunk" that the insurance company is certain to settle for the policy limit. The lawyer does typically know that and is happy to take the case, on a standard contingency fee of 33 percent, to score a windfall at the plaintiff's expense. This potential for abuse is at the root of the contingency fee reforms that are focused on plaintiff protection -- admittedly different from the "blunt instrument" caps we're discussing. (Yes, I agree with you that percentile fee caps are a crude reform measure, as I said before. So are damage caps. But that doesn't mean they can't be effective.)

What we have when it comes to contingency fees is a market failure. Unsophisticated plaintiffs can't value their cases and therefore can't bargain with their attorneys over price. They can't shop on price -- they're too unsophisticated to know a good attorney from a bad one, and might indeed be suspicious that a "cheaper" attorney isn't as good, whether that's the case or not. Thus, as Lester Brickman has shown, there isn't really any price competition over contingency fees. Now I disagree with Lester's claim that the lack of price competition is likely due to collusion; as those of us with training in economics are well aware, collusive arrangements are very difficult to maintain and would be virtually impossible to maintain for a group as broad and varied as contingency fee lawyers. It's the very fact that plaintiffs in contingency fee cases have too little information and understanding to shop and negotiate on price that leads contingency fees to be set at a standard level.

So, there are ethical reasons to question the contingency fee, from the plaintiff's perspective. Unlike Professor Brickman, I tend to approach most of these questions from a law and economics rather than an ethical perspective, but the above-normal windfall from noncompetitively priced contingency fees almost certainly helps drive excess litigation.

Why is that? Well, let's start with Lester's seminal study concluding that contingency fee lawyers, on average, make above normal profits relative to their hourly brethren, even after adjusting for risk. I view that paper similarly to yours and Eric's on contingency fees: very useful work, but the wrong analysis. (I know I haven't yet laid out in detail why I think that is for your paper, but I will in my next post, as I said at the outset. I just want to get the main theoretical debate on the table first.) I find it hard to believe that contingency fee plaintiffs' lawyers, on average, make a risk-adjusted return higher than hourly attorneys, because if that were the case, hourly attorneys would switch to contingency work.

And that, I think, is just what has happened. Lester's study, importantly, looks at the top quartile of contingency fee lawyers. Some of those lawyers are indeed getting paid handsomely for risk, luck, or performance. Others are exploiting the information imbalance between plaintiffs and lawyers to get extra cash based on the absence of price competition over fees. But among the lawyers not in the top quartile, a lot are doing worse than hourly lawyers. They're often less skilled, in courtroom work, in preparation, in case screening, or even in advertising strategy. Still, they stick around chasing the big payoffs, at least as long as they can. The absence of price competition over contingency fees leads directly to more contingency fee lawyers -- and more lawsuits and cost to society.

Of course, the mere fact that there's a market failure need not imply a regulatory response. Far too often, those with too little respect for limited government ignore the cautions of public choice theory and the law of unintended consequences and rush to "correct" market imperfections with cures that are worse than the disease.

But so too is it the case that merely because we generally respect the law of contracts -- and indeed think that the substitution of the law of tort for that of contracts over time is a major underpinning of overlitigation -- we need accept every contractual arrangement. You admit as much in saying "we don't enforce contracts against the public interest." My argument is that contingent fee contracts, at least in some cases, can be just that, as I'll explain further in my next post.


My intention today was to get fully into my critique of your article with Eric Helland, but after your most recent post, I again wanted to clarify some theoretical issues. To keep this entry at a readable length, I'm posting it first. I'll follow up tonight or in the morning with an analysis of your empirical findings.

In your most recent post, you draw an analogy between contingency fee arrangements and arrangements in which "superstar" actors and actresses -- like Julia Roberts -- get a piece of the eventual revenues from their movies. You then suggest that such forms of actor compensation are a major reason why we have bad, dumbed down "blockbuster" movies -- and argue that nevertheless we shouldn't regulate actors' movie contracts (that's an easy point of agreement!).

I don't think your analogy works on a number of levels. Studios, not actors, are the main drivers behind the "blockbuster" business model. They may be coming into question of late, but summer blockbusters have been the industry's staple since Jaws and Star Wars hit it big some 30 years ago. The blockbuster movie model predated actors' ability to get a slice of movie revenues, not the other way around.

Now, a limited group of actors has proven its ability to "draw" audiences based on reputation alone, and has thus gathered a piece of the pie (not on a true "contingency" basis but rather on top of a multimillion dollar guaranteed fee). But this group is a very limited one, and includes only the "top draw" actors like Tom Cruise, Julia Roberts, Reese Witherspoon, Will Smith, and a handful or two others. These artists get a stake in blockbuster movies' outcomes because they have negotiating leverage based on their unique human capital, a proven brand name that virtually guarantees ticket sales. But the run-of-the-mill actor doesn't get a percentage of the movie's profit. The "superstar actor" model, then, is very different from what we observe with contingency fee arrangements for lawyers, in which the vast majority of plaintiffs' lawyers in personal injury/ products liability/ medical malpractice cases work on a contingency fee -- at essentially the same standard 33% level.

Studios, unlike the vast majority of contingency fee plaintiffs, have no liquidity constraints when it comes to paying actors. They may get some improved performance out of superstar actors when they give them a piece of the pie, by inducing them to be more enthusiastic about promotional movie junkets. But that incentive effect is much more analogous to incentives offered to top corporate executives in the form of stock options than lawyer contingency fees; and with the exception of employers trying to wring union concessions via ESOP plans, stock options only go to key personnel.

So when it comes to clever but misleading rhetorical devices, I think the "actor superstar" analogy fits the bill. And, most importantly, it conveniently sidesteps the crucial difference between employee incentive arrangements in the free market and contingency fee arrangements in the legal market: litigation involves using government force to redistribute wealth, whereas movie sales involve willing consumers. If I pay for a movie, then I presumably value the experience more than the ticket price. I may sometimes be disappointed, ex post, just as I might be for a meal, a bottle of wine, or a basketball game. But going in, I expect to prefer the experience to the cash. The social planning instinct that underlies wanting "better movies" through contract regulations is of course silly to those of us with libertarian instincts -- and after all, in this day and age we can watch classic movies via Netflix or AMC; visit art house cinemas; or take in opera, theater, and the like.

But litigation is a different beast entirely. What the plaintiff and lawyer are contracting for is to take money from someone else. While it isn't quite the same as Tony Soprano paying a henchman to shake down a local business owner for "protection," it isn't always so different. Yes, in an ideal world, our legal system would be the perfect black box that only spit out awards to deserving plaintiffs, quickly and at low cost. But it isn't.

There are a couple key points that bear emphasis:

First, litigation costs society. Lawsuits are not just market transactions in which two parties both benefit, helping society apart from any negative externalities. Plaintiffs may be perfectly happy to give up one-third of their ultimate winnings to obtain financing and reduce attorney-client agency costs. But let's not forget that defendants and companies insuring defendants end up paying over one-third of all litigation costs. Moreover, market incentives are significantly distorted by the prospects of litigation. If you believe, a la Calabresi, that the courts are on average creating distortions that drive decision makers in the economy to reduce true "accidents" or social costs, at an efficient level, you're just fine with that (as long as the social costs reduced exceed the dead weight loss of the system). But if you agree with Peter Huber that such distortions are actually welfare and safety reducing (as the recent study by Paul Rubin and Joanna Shepherd tends to suggest), you've got an even bigger reason to worry about litigation's effects on our society.

Second, contingency fees increase the quantity and decrease the quality of litigation. I've suggested a couple of mechanisms through which this effect happens, which you consider to be in "real tension." Well, let's see. First of all, most contingency fee plaintiffs are unsophisticated, creating a market failure because there's no price competition over the fee. Apart from the Brickman studies previously cited, I think that the fact that fee percentages are not varied based on case risk (or in most instances attorney quality) is extremely evident to anyone with much familiarity with the legal system. As Walter Olson pointed out on Overlawyered yesterday, David Giacolone recently wrote extensively about this market failure on his blog, in much more detail than I have here. (I don't agree with everything he says, but it's very interesting.) In my view, the fact that there are a lot of cases in which attorneys on a contingency fee get high returns for little risk leads a lot more attorneys -- filing a lot more lawsuits, often dubious -- to enter the field. The latter attorneys do worse than their hourly fee brethren, but the end result is more lawyering, and more money for lawyers on both sides.

The second mechanism I suggest to explain how contingency fees drive up the quantity and reduce the quality of litigation is the very fact that contingency fee lawyers have a big incentive to file low probability, high value cases because they have a stake in the outcome. In your initial post you attacked this line of thinking in a couple of ways. First, you note that "the lawyer's client has exactly the same incentives (indeed, given a contingent fee of 1/3rd, twice as strong incentives!)." But that isn't really very compelling to me: remember, the plaintiff, just like Tony Soprano, may have lots of incentive to shake down a business, but that doesn't mean that society is better off if he does. It doesn't really trouble me that some plaintiffs who aren't liquidity constrained (and who are capable of assessing and monitoring their cases) might still find ways to file low probability cases. To begin with, the contingency fee from the outset was a mechanism for giving the poor access to the legal system. That the non-liquidity-constrained might prefer it, too -- because it reduces monitoring costs but also because it gives attorneys incentives to cut ethical corners -- doesn't in my view add much to the debate. And it isn't really in tension with the fact that some plaintiffs are abused, either: the corporations and rich folks who want contingency fee lawyers are almost certainly better able to protect themselves from their own attorneys' potential abuse.

Your second argument against my point that contingency fees encourage "low probability, high value" lawsuits is that "[n]ot all low-probability, high damages cases lack merit." Well, sometimes that's true (though I'd say that on average we witness the opposite effect -- that cases that really lack merit are high probability due to bad laws or rules, or judges' or juries' prejudices). But you wouldn't really argue that in our legal system good cases are on average very unlikely to win, would you? Even accounting for selection bias, that's hard to believe when over 50 percent of civil jury trials result in a plaintiff verdict. In reality, most low probability cases are low probability for a reason: the plaintiff shouldn't win (but might given a bad judge or jury). Recognizing that litigation costs society due to huge administrative costs and substantial distorting effects, as I explained in point 1, we really don't want those cases in court.

Finally, the fact that contingency fees create a direct and very powerful incentive for attorneys to bend the rules is a crucial point. Attorneys having a stake in the outcome gives them a strong inducement to generate fraudulent claims, fabricate evidence, and suborn perjury. Hourly fee attorneys are zealous advocates, for sure, but without a stake in the outcome of the case, their advocacy typically has real limits. If you don't believe that the contingency fee has an extremely powerful effect on attorneys trolling for clients, consider what Ted Frank reported on Overlawyered a couple weeks back: "Six of the eight most expensive Google AdSense search terms are for attorneys (the other two are for mortgage and loan refinancing), with 'mesothelioma lawyers' topping the charts at $54.33." And if you don't think that contingency fee lawyers haven't been manufacturing false claims on a grand scale, take a look at Janis Graham Jack's findings in the silicosis litigation (along with our commentaries), or what Judge Harvey Bartle found in the fen-phen litigation (summarized nicely in a recent Forbes article). I haven't heard of any silicosis or fen-phen lawyers working on hourly fees. But one thing's for sure: these cases are extremely costly to society.

In sum, I think the contingency fee is a primary cause of the litigation explosion. The contingency fee caps you and Eric study are a crude mechanism to be sure, but their problem isn't that they infringe on the right to contract but that they don't go far enough. Your empirical analysis, as you interpret it, directly undermines the arguments I've made above: you conclude that contingency fees on average improve case quality and lower the time it takes cases to settle -- presumably increasing the social welfare. I think you misinterpret your data, though, as I'll explain in full later tonight or in the morning.

Drop by Drop

April 13, 2006 3:19 PM


OK, at long last I want to start getting at the substantive meat of your article with Eric Helland. Your article makes two key findings that lead you to conclude that in states with contingency fee caps, plaintiffs' lawyers switch to hourly fees and exploit their clients:

  1. You observe that in states with contingency fee caps, lawyers are more likely to drop cases they've filed; you interpret this finding as evidence that in those states more plaintiffs are suing using hourly fees, and -- being unsophisticated -- are duped by their lawyers into filing bad cases.

  2. You observe that in states with contingency fee caps the average time it takes a case to settle is longer; again, you interpret that finding as evidence that those states have more suits filed using an hourly fee, in which lawyers are stretching out their cases to rack up bills on their unwitting clients.

In this post, I'll set out my initial objection to your theory itself and offer an alternative explanation for your first result. I'll get to your second finding in my next posting.

In my view, your results are consistent with your theory that contingency fee caps cause lawyers to switch to more hourly work and thereby rip off their clients; but your theory is not the only -- or the most persuasive -- explanation of your results. The big problem I have with your theory (and its application to your empirical results) is that it doesn't match reality. Yes, some contingency fee litigation involves businesses that would switch to hourly rates on the margin when fee caps are imposed. But the overwhelming majority of contingency fee plaintiff cases exist in the American system solely due to the contingency fee itself; by definition, the clients lack sufficient liquidity and sophistication to hire hourly lawyers. Lester Brickman raised this essential critique in an AEI conference on your paper in 2004:

Alex Tabarrok's paper has several false assumptions. His assumption that contingency fee caps are a surrogate for hourly rates does not reflect the real world. Attorneys do not combine hourly rates with contingency fees -- they do in commercial litigation, but not in tort cases. Instead, caps are a practical way of lowering the effective hourly rate of return to attorneys, thereby reducing the overall volume of litigation.

Contrary to Tabarrok's assertion that there is no reason to think fee caps will decrease effective hourly compensation, there is no reason not to think that caps will decrease effective hourly compensation. Fee caps will move the threshold of risk such that attorneys working on contingency fees will take lower-risk, lower-return cases and pass on the higher risk cases of questionable merit.

In reaching his conclusions, Tabarrok assumes that a variety of fee agreements are available to plaintiffs, including agreements that waive fees. Empirically, the market for legal fees is not competitive, and so the kinds of flexible agreements which the paper presumes possible simply are not observed.

Tabbarok's critique of fee caps rests heavily on unwarranted assumptions. If society deems it a worthy goal, fee caps will reduce the volume of litigation by reducing the effective compensation to attorneys.

I think Lester's right here. You basically pooh-pooh the point, arguing that it's "trivial economics": "Imagine that tips for waiters were banned. What would happen to wages? They would increase. No big surprise but apply the same idea to lawyer contingent fees and we get lots of objections."

But I think what you're going after here is a straw man. Of course substitution effects exist. Of course contingency fee lawyers would shift on the margin to hourly work if caps were imposed. The real question, though, is whether that hourly work would involve the same type of work the lawyers performed with the contingent fee. And on that question, I'd say no; rather, I'd say that on the margin you'd have fewer of the products liability, medical malpractice, and personal injury cases the contingency fee reform was designed to reduce. Lawyers couldn't afford to pursue as many of those cases, of the shoot-the-moon variety, with contingency fee caps. Nor would they have those very same plaintiffs lining up to pay them hourly rates for the same types of cases. I think what you'd see is lawyers substituting hourly work of a different variety -- trusts and estates, family law, real estate, transactional. The increase in labor supply in those fields of law would push hourly rates down over time, and ultimately on the margin induce some lawyers to substitute nonlegal for legal work, in essence giving up the sunk cost that was their legal education and experience.

If you can come up with contrary evidence here -- even anecdotal -- I'd love to hear it. Can you show that there are a lot of medical malpractice cases being filed using hourly fees in states with contingency fee caps, like New York, Illinois, and California? Since that supposition is the linchpin of your theory, it would be nice to see even a quantum of evidence that lawyers are behaving consistent with your theory in the real world.

With that said, I'll move on to interpret your analysis of case drops.

Dropping the Ball: An Alternative Interpretation of Higher Case Drop Rates in States with Contingency Fee Caps

Chapter 5 of Judge and Jury, and the AEI paper on which it's based, are laymen's versions of a 2003 article you and Eric published in the Journal of Law, Economics, and Organization, available at 19 J.L. Econ. & Org. 517 ($). Your first major observation is that among medical malpractice cases filed in states in which contingency fees are capped, "18.3% of medical malpractice cases are dropped, but only 4.9% are dropped" in states without contingency fee caps. 19 J.L. Econ. & Org. at 531. You also look at what happened in the state of Florida before and after contingency fee caps were imposed and observe "a 15% increase in drops" after the caps were put in place.

I should note to our readers that your technical paper includes much more sophisticated analyses than the laymen's version in Judge and Jury. Specifically, you and Eric run two more sophisticated tests -- econometric regressions -- to see if the observed increase in drop rates still holds once you control for other factors. (Your methodology for analyzing your data across states is quite ingenious, I might add: you control for variation across states by observing differences between medical malpractice cases, in which fees are capped, and auto accident cases, in which they're not.) On one of your two cross-state tests, and on your Florida test, you find again that drop rates are significantly higher when contingency fee caps are in place.

Well, at first blush, this doesn't look too good for Copland's theory, does it? I mean, I hypothesized that by reducing the effective rate of return for attorneys who file low probability, high dollar claims, you'd improve overall case quality. On the surface, then, it doesn't make much sense that you'd see more dropped cases when states had caps on fees.

But let's step back a minute. As I noted in my first post, a rational plaintiffs' lawyer (risk neutral, with a diversified portfolio of cases) will accept a contingency fee case if and only if:

F*Pr*D > C


F = contingency fee ratio,
Pr = probability of success at trial,
D = expected damages at trial, and
C = cost of pursuing and trying case.

As I noted then, however, it's crucial to realize that the probability of success at trial and expected damages at trial are best viewed as ranges, not certainties, and that in any event they are not constant over time. Herein, I think, lies the most plausible explanation of your findings.

Why is that? Well, the probability of a case's success, from the perspective of the plaintiff's lawyer, varies over time. Litigation involves various stages:

  1. Pleading. In the United States today, the dominant rule is "notice pleading," in which "the plaintiff is required to state in their initial complaint only a short and plain statement of their cause of action. The idea is that a plaintiff and their attorney who have a reasonable but not perfect case can file a complaint first, put the other side on notice of the lawsuit, and then strengthen their case by compelling the defendant to produce evidence during the discovery phase."

  2. Discovery. Here the parties exchange information in "the pre-trial phase in a lawsuit in which each party through the law of civil procedure can request documents and other evidence from other parties or can compel the production of evidence by using a subpoena or through other discovery devices, such as requests for production and depositions. In American law, discovery is wide-ranging and can involve any material which is relevant to the case excepting information which is privileged or information which is the work product of the other side."

  3. Summary Judgment, Settlement, or Trial. The parties look for the judge to rule for one side or the other as a matter of law, they try to settle the case, and if all else fails they go to trial.

Viewing cases in this light -- how they actually occur in practice -- helps us to see what I think is actually going on here. Notice pleading is very, very cheap for the plaintiffs' lawyer. All a plaintiffs' lawyer has to do is pull up his template on Microsoft Word, alter a few names, dates, and phrases, and -- voila! -- notice is served. The plaintiffs' lawyer can then demand that the defendant produce documents, attend depositions, and the like.

And herein lies our answer. When a plaintiff first walks into the lawyers' office -- having seen that ad telling him he only need pay if he wins -- all the lawyer can observe is the plaintiff's level of injury. He cannot determine with any certainty whatsoever how likely he is to win at trial: that involves proving causation, i.e., that the plaintiff's injuries were caused by the doctor or hospital; and fault, i.e., that the doctor or hospital was negligent in causing those injuries. At the outset, when he signs up the plaintiff and assumes the minimal expense of filing the case, he only has his perception of the plaintiff's credibility to go on.

But once the defendant files a reply and discovery starts, it's a whole new game. Now the plaintiffs' lawyer starts to get a lot more information about what went on from the defendant's point of view. He starts to figure out just what the defense is probably going to look like at trial. So he readjusts his probability range, upwards or downwards, in a narrower band, based upon the information he has received.

Once we view the problem this way, it should come as little surprise that we see higher drop rates in cases in which we have contingency fee caps. At the outset, whether a state has contingency fee caps or not, lawyers sign up cases if the damages are sufficient that it might be worth their while to go to trial. Once the lawyers get more information as the legal process continues, they have a better estimate of the cases' real value. For any case, if the new expected value based on better information is below the expected cost to try the case, the lawyer drops the case. If the damages are really great, some low probability cases might still survive -- consistent with your strong empirical finding using the Florida data that cases with "permanent and grave" injuries were much less likely to be dropped. But for a significant subset of low probability cases, the expected value, once you have good information, is too low to justify pursuing when you have a cap on contingency fees but still worth taking a shot at if you have unlimited contingency fees. So you have more dropped cases in states with contingency fee caps precisely because the caps work as expected: once information emerges that refines the probability assessment for the plaintiffs' lawyer, he's more likely to drop the weaker cases.

In my interpretation of your results, then, contingency fee caps do work to eliminate bad claims. Because my interpretation is much more consistent with what we actually observe on the ground -- namely, that the relative merits of a case only emerge with any precision for the plaintiffs' lawyer after the claim is filed, and that we simply don't see lawyers pursuing med-mal cases on an hourly basis in states with contingency fee caps -- I think it's far more compelling than the explanation you give.

The legal profession is necessarily detail-oriented, and lawyers quite regularly miss the forest for the trees. But economics is necessarily a simplifying profession, and we must be vigilant to ensure that those simplifications make sense. When the assumptions of our economic models don't match reality, we can reach bad results.

Is Lawyer Licensing Necessary?

May 19, 2006 11:52 AM

Recently, Larry Ribstein and I kicked off a debate on the necessity of lawyer licensing. (Past POL coverage: Is Lawyer Licensing Necessary?; A Response to Professor Ribstein; A Response to Wilson).

The topic must have touched a nerve, as a number of the leading blawgs chimed in and even the Wall Street Journal conducted an online poll on the topic. (Smug aside: As of Friday afternoon the "yes" votes commanded a 59%/41% lead.)

Our hope in this week's Featured Discussion is to dig into this topic further. My own view is that this question, when viewed from the proper angle, offers a number of suggestions for how the legal profession and the American system of litigation can and should be reformed.

What is Lawyer Licensing?

By defending lawyer licensing, I am defending a system whereby, in order to legally practice law, an individual must receive a license at the state level. In nearly every state, this license takes the form of admission to the bar, usually following successful completion of an ABA-approved course of study and passage of the state's bar exam.

Most state bars also require an applicant to complete a "moral fitness" examination. In my home state of Georgia that entails a detailed personal application, identifying every place of residence, job, and course of study taken by the applicant since the age of 18. The moral fitness exam in Georgia also includes an investigation of the applicant by the bar's examiners (many of whom are former FBI agents) and contacting the applicant's relatives, friends and neighbors to validate the applicant's claims.

So what is it, exactly, that lawyer licensing is supposed to achieve?

Lawyer Licensing Ensures Competency and Moral Fitness

As one of the pamphlets for the Georgia Office of Bar Admissions states:

When a client walks into a lawyer's office, he has the right to assume both that the lawyer is competent in the law and that the lawyer will conduct the client's matter in a professional and ethical manner. The responsibility of ensuring that those who seek licensure as attorneys are competent and are fit to be licensed is shared by two separate and equal boards: the Board of Bar Examiners, which deals with the questions of the applicant's competence; and the Board to Determine Fitness of Bar Applicants, which inquires into the character and fitness of the applicant.

The chief purpose of lawyer licensing is to ensure technical competence and at least the minimum level of moral character required to perform as an attorney. This aim supports a number of public policy goals:

1. The public is protected by the state mandate that only licensed attorneys can hold themselves out to the public as qualified, both technically and morally, to practice law.

2. The state is protected by ensuring that attorneys who appear in its courts have a sufficient level of competence. (An excessive number of incompetent practitioners could clog the courts with inappropriate or excessive process. [More on this later]).

The moral examination, at least in Georgia, is quite rigorous and includes questions and third party validation of the following points for each applicant:

unlawful conduct; academic misconduct, including plagiarism; making of a false statement, including omission of relevant facts in the fitness process; misconduct in employment; acts involving dishonesty, fraud, deceit or misrepresentation; abuse of legal process; neglect of financial responsibilities, especially failure to repay student loans; neglect of professional obligations; violation of an order of a court, especially failure to pay child support; evidence of mental or emotional instability; evidence of drug or alcohol dependency; denial of admission to the bar in another jurisdiction on character and fitness grounds; disciplinary action by a lawyer disciplinary agency or other professional disciplinary agency of any jurisdiction

So, at its heart, the issue of lawyer licensing is one of protecting the public from the baneful effects of incompetent or immoral lawyers.

But the Current System is Flawed!

Readers of these pages know that our litigation system is flawed and at least some measure of responsibility for those flaws rests with attorneys, the bar associations that license and police the attorneys and the judges who began their careers as attorneys. Supporting the continued licensing of lawyers does not necessarily entail blindness to the shortcomings of the current system.

Indeed, the flaws in the status quo suggest that lawyer licensing should be improved and strengthened, rather than eliminated.

The Laissez-Faire Argument

Of course all students of the school of law and economics prefer a market solution where one exists. In his paper on the subject, Professor Ribstein suggests that lawyer licensing is unnecessary, except to the extent that it facilitates the involvement of attorneys in the law-making process.

Without addressing the professor's theory of lawyers' property rights in the law of their home states, I think a more direct justification for lawyer licensing is that laissez-faire simply doesn't work when it comes to the market for legal services.

In classical economic theory, a free market works efficiently to set prices among competing goods when there is ubiquitous and accurate information concerning the relative merits of competitors.

As I describe in Out of Balance: Prescriptions for Reforming the American Litigation System, in the market for apples, there is exactly this kind of information. Everyone knows what they like (or don't like) about apples. A consumer who wishes to compare the apples from producer A and producer B, for minimal cost, can sample both and choose the one that presents the preferred qualities and price.

Legal services are utterly unlike apples. Consumers are ill-equipped to evaluate the skills of competing attorneys and the cost of "sampling" attorneys is very high. Indeed, the cost of sampling an attorney's services (and the possible consequential damages if the attorney proves to be unskilled) could be disastrously high. An ex post facto analysis of the quality of the service will, in nearly all cases, be completely inadequate.

Bad Facts Make Bad Law

Professor Ribstein began this debate by recounting a particularly ugly story in which Brian Woods represented his autistic son in litigation against the Akron school board involving the son's access to educational facilities. After successfully obtaining a remedy, Mr. Woods was rewarded by an unauthorized practice of law prosecution, initiated by the Cleveland Bar Association. Professor Ribstein connected this case to lawyer licensing when he wrote:

Since Mr. Woods could have acted as his own lawyer, and for his son in finding a lawyer, there's obviously no reason not to let him decide to dispense with the lawyer rather than paying the huge fee a lawyer would have asked or having to drop the case.

The Ohio Supreme Court was right to have chastised the Cleveland bar and there seems to be widespread agreement that the bar should not have gone after Woods. I would even be amenable to a more general rule that permits close family members who are unlicensed to represent each other in non-criminal cases. The family relationships in those situations generally eliminate the client-protection rationales for lawyer licensing.

But Brian Woods' good fortune as a pro se litigant does not mean that every Tom, Dick and Harry should be permitted to hang out his (or her) own shingle.

In-house practitioners like myself quickly amass a treasure chest of war stories involving pro se litigants. Litigating against a pro se plaintiff, in many situations, is more costly than litigating against a well-heeled attorney. The plaintiff who represents himself will often get "velvet glove" treatment from the judge (who fears looking like a lout on appeal) and the professionally-represented defendant will be forced (via the American rule of attorneys' fees) to literally pay for the plaintiff's education on the finer points of law.

Rather than the somewhat orderly pre-trial and discovery process that results when professional lawyers practice their craft, the self-represented plaintiff will force his professional opponent to respond to out-of-order motions and arguments, helter-skelter, in an inefficient and lengthy march towards the likely conclusion of a defense victory.

So, while I applaud the individual merits of parents like Brian Woods and am somewhat embarrassed when bar associations create this kind of bad publicity for themselves, stories like this one do not justify the wholesale elimination of lawyer licensing. At most, they may suggest the need for limited exceptions to the general rule that attorneys must be licensed.

What Would an Unlicensed Bar Look Like?

Perhaps the best argument against eliminating lawyer licensing is asking the question, "what would our litigation system look like if lawyers were not required to be licensed?"

Do you think our courts have too many weak or unjustified cases?

An unlicensed bar would compound that problem as individuals with no legal training would be free to make up whatever legal theories they wish. With the American rule of attorneys' fees, defendants will bear the costs of disproving every harebrained theory that comes along.

Do you think our courts are two willing to consider unscientific legal theories and novel theories of liability?

If every citizen were free to hold himself out to the public as a legal advocate for hire there would be no end to the novel legal theories these hired guns would be able to pursue. Perhaps judges might be prompted to clamp down on novel claims in a post-licensing era, but the past offers little reason for optimism.

Licensed attorneys have enough difficulty applying the Daubert rule to their cases in the current regime. Do you think that unlicensed attorneys would have a better chance of getting it right?

Are the existing limitations on lawyers' ability to pursue weak or frivolous cases toothless and ineffective?

Imagine how toothless and utterly irrelevant they will become when unlicensed lawyers can defend themselves against Rule 11 sanctions by complaining that they had never heard of Rule 11. If any person could act as an attorney, why even bother having principles (like Fed. R. Civ. P. 11) that hold some persons to a higher standard than others? How could an unlicensed attorney, perhaps with no legal training whatsoever, distinguish between those arguments that are valid and those that are not?


Criticizing the legal profession for protecting its turf via UPL prosecutions is fair game. Lawyers are often their own worst enemies when it comes to their public reputations and their share of the public trust. When the legal profession allows its sense of professionalism to atrophy and when the state bars become little more than trade associations for a guild that protects its own, its entirely understandable for sensible persons to question why the state bars should hold a monopoly on the licensing of lawyers.

But this criticism ought to remind us why lawyer licensing is necessary and the flaws in the status quo should give us reason to preach reform, rather than deregulation.

Lawyers behaving badly is a far too common occurrence. The solution is to tighten the rules of ethics and to empower prosecutors to pursue lawyers who breach those rules.

A related solution for the problem of a profession that has lost its sense of professionalism is to reform those laws that tend to encourage lawyers to think of their craft as just another good in the marketplace. If our sense of civil justice is offended by "complaint mill" plaintiffs who churn out hundreds of filings in the hope that a handful will result in a lucrative payday we should reform the laws that permit this practice, rather than empowering the general citizenry to engage in the practice.

Deregulating lawyers as punishment or retribution for a profession that has lost its way would be a recipe for disaster. Deregulating the practice of law would open the floodgates to fraud of every conceivable variety and would only compound the problems that the readers of these pages see in our civil justice system.

Larry�s argument seems to have a central premise: requiring lawyers to be licensed decreases the supply of lawyers and increases their price; the public would be better served by increasing supply (via reduced licensing requirements) with a consequently lower cost:

�Yet while a license arguably communicates little useful information, in many respects licensing sets too high a bar. How much legal history, philosophy and economics, to name a few of the subjects students learn in law school, does a lawyer need to handle a real estate conveyance, to name one of the subjects few students learn in law school?

Because all this costly learning reduces the availability and raises the costs of legal advice, licensing hurts the poor and lower income people licensing it is supposed to help. Their only recourse may be self-help. I�m reminded here of a study showing that regulation of electricians increased electric shocks to do-it-yourselfers. �

I agree that there are days when I wonder why I needed to sit through all those hours of classes. I have the same thought when I go into to see my doctor about a wart on my arm and he proceeds to burn it off with some liquid nitrogen, only to bill my HMO $85 for an exercise that took him only 3 minutes. (That�s $1,700 per hour for you lawyers who don�t have calculators).

But then I remember those moments in my career when I spotted an issue my client missed because something in my legal training allowed me to pull together disparate pieces of information. And that is why both lawyers and doctors should be required � by law -- to have a substantial course of training before they can practice in public.

The nurse (who is also licensed, by the way) could have burned off my wart, but every now and again my overly-trained doctor is going to spot an issue the nurse might have missed. Individual transactions might create an appearance of overpricing, but each transaction comes loaded with liability for the doctor. A substantial part of the doctor's value rests in issue-spotting and being able to react immediately to an emergent situation. So it is also with lawyers.

Does this tend to decrease the supply and increase the price of lawyers? Perhaps.

Those corporations who purchase legal services from the AmLaw 100 probably would not notice a difference if lawyer licensing were eliminated. The unlicensed Tom, Dick and Harrys of the world probably won�t be competing for the same clients as, say, Cravath, Milbank, King & Spalding, and so on.

The impact will be greatest on those who cannot afford lawyers now, the poor and the middle class. Today they rely on Legal Aid, legal clinics, friends, neighbors, relatives and self-help. They�ll still rely on these old standbys in a deregulated future, but they�ll also be tempted to try unlicensed alternatives and here is where the mischief will be made.

Online services and other unlicensed individuals will setup shop to sell legal services that they are prohibited from selling today. Their contributions to the legal �marketplace� will have no effect on the price of legal services to corporations, who will continue to buy top shelf lawyering, but they will sell their services to the poor and the middle class. To the extent their unlicensed services are deficient; it is the poor and the middle class who will feel the brunt of those failures.

Will some unlicensed practitioners supply a need that is unmet today? Probably so. And so would the unlicensed doctor who might provide unlicensed healthcare at a cut rate with 90% accuracy. The problem will come from the 10% error rate.

Imagine the horror stories that will quickly abound when the floodgates to the legal market are flung open. Dateline, 20/20 and every investigative reporter that ever caught a scoop will do a piece on some middle-class family who was duped by unlicensed lawyering. Inevitably every piece will end with a �call to action� which will quickly become a �call to regulation�. Either the legal profession will be re-regulated (and under what scheme we cannot know) or the legislature will be called upon to regulate whatever particular transaction seems to be causing the most pain.

The outcome, for those free market advocates among us, will be one with more regulation, and not less.

Barristers Anyone?

Professor Ribstein suggests that we might return to the English distinction between barristers (who are licensed to appear in court) and solicitors (who may practice law without appearing in court). This distinction appears in many other first world legal systems and might well be an improvement on our own.

But we could implement a distinction between barristers and solicitors without abandoning the state licensure of attorneys. If you would like to increase the licensure requirements for lawyers who file pleadings, but decrease the requirements for lawyers who don�t: go right ahead.

But if Professor Ribstein�s central thesis (that restricting the supply of lawyers artificially inflates the price of lawyers) wouldn�t this restriction exacerbate the problem?

Litigation Lottery

Larry reacts to my argument that the loss of licensure would stimulate further unnecessary or non-meritorious litigation:

�There are better ways to deal with excessive litigation. We could have stricter pleading rules, or require losers to pay winners� fees. Or how about this: let anybody into court, but adopt a loser pays rule for parties that come into court represented by anything less than a lawyer with the highest possible trial certificate. �

These are all great tort reform ideas, of course, and many have been discussed on these pages. As our dedicated readers know, however, most litigation reform proposals get shot down either (a) in legislatures dominated by the trial bar or (b) by state supreme courts who find constitutional infirmities in any changes to the rules. Both efforts are often supported by a credulous and uninformed mainstream media that is too quick to believe the trial lawyers' spin that reforming litigation will �lock the doors to the court house� etc.

If litigation reform is tough when every plaintiff is represented by a licensed attorney, how much more difficult will it be when pro se plaintiffs are going to bear their adversaries' costs in an unsuccessful suit? From a �free marketer�s perspective� there is a certain theoretical elegance to a loser-pays rule for pro se plaintiffs, but if 45 of the 50 states (plus the federal courts) are already frightened by loser pays, they�re never going to accept loser-pays for those who cannot afford licensed attorneys. All of the �eat the rich� arguments that the trial lawyers use to defeat these proposals today will have even more teeth when the proposals are selectively aimed at those with unlicensed attorneys.

A Truly Better Way

Professor Ribstein is right when he says, �There�s a lot of discontent with lawyers. The masses are ready to storm the citadel. The time has come to contemplate the end of the lawyers' cartel.�

Here�s a better way to do it:

The President has carped about �frivolous lawsuits� for years but, apart from supporting the Class Action Fairness Act, he really hasn�t done anything about it. Here is a modest proposal through which the President can harness the energies of those who would �storm the citadel� and simultaneously allow the President to take the moral high ground in this debate:

Empanel a blue ribbon commission of lawyers, academics, economists and business leaders to examine the question: Why is there so much litigation in American and what should we do about it? In the dialogue before the commission is announced, float a trial balloon that one of the ideas the commission will investigate is the elimination of state lawyer licensing.

Merely whispering this idea will prompt the state bar associations to reform in ways not previously imagined. There is nothing that they fear more than losing the power to regulate their profession. (As a former member of the Board of Governors of the State Bar of Georgia, I�ve been party to conversations along these lines).

The process, with public hearings and the inevitable report and sound bites, will educate the public and the media. The state bars will spring to action, tightening their licensing requirements and toughening their reactions to rogue lawyers.

This may not be a perfect plan, but it�s better than eliminating lawyer licensing.

My initial thoughts on Election '06 are, in general, very much in line with Ted's and Walter's. The U.S. House is going to change hands, period. The question is not if the Democrats will take control but whether they'll have a sufficient margin of victory to have real working control, versus a bare majority.

The Senate could change hands, too. I think whether the GOP has control of the Senate, even slightly, is more important than my friend Ted does. Voting down a Supreme Court nominee by a majority is very different, in terms of electoral resonance, than via a filibuster. "Majority rules," if dubious in terms of public choice theory, makes for a potential rallying point--and filibustering a conservative appointment to the High Court could be a great antidote to disenchantment among the Republican base. Of course, if nobody steps down from the court over the following 2 years, I tend to agree that 49-51 and 50-50 aren't too different.

As of a week or two ago, I'd have said the GOP would hold on to the Senate with the barest of majorities. But George Allen's continuing gaffes--highlighted most recently by his effort to paint Jim Webb as a sex pervert based on his acclaimed war novels--make it look much more likely that Virginia could switch over.

The unknown variable in that race is the anti-gay marriage ballot initiative, one of the several Walter alludes to. The Old Dominion State's version is particularly troubling, I think, in that it potentially abrogates private contracts by stating that Virginia "shall not create or recognize a legal status for relationships of unmarried individuals that intends to approximate the design, qualities, significance, or effects of marriage." Proponents insist that the language is intended to prevent courts from recognizing a right to civil unions--an argument sure to be reinforced by New Jersey's recent decision to that effect. See the decision here. How the courts would ultimately interpret the amendment is an open question, though, and we should expect lots of future litigation over custody and trust/estate issues, among others, were the amendment to pass. From the Senate race standpoint, the question is whether the amendment will mobilize "base" voters, on either side, and if the conservative base is so mobilized, whether they'll stay home with Allen or cross over in some numbers to former Republican and war hero Webb.

If the Allen seat does switch, and the Dems hold onto Maryland and New Jersey, which seems likely, and take over the Santorum, Chaffee, DeWine, and Burns seats, which seems even more likely, the Dems will have a net pick-up of 5, one below their magic number, with only GOP two seats in play, Tennessee and Missouri. Harold Ford has run a good race, but Corker looks to be well-positioned there, notwithstanding pundits' efforts to make the RNC's satiric ad into a "Willie Horton" issue. (Or perhaps because of those efforts--the Dems were the ones who brought both ads to the fore; and one can't imagine that the moderate majority of Tennessee folks who aren't racist like to be portrayed as backwater dupes by the national media.)

Which brings us to Missouri, where the race between Talent and McCaskill is the closest on the Real Clear Politics tracking polls, and split 50/50 on the trading markets. The race for national control of the Senate may thus come down to how long they keep the polls open in the home of the World Series champs.

As for interesting state races to watch, my eyes will first go across the Mississippi from St. Louis, to Madison County, the topic of my next post.

James R. Copland

On January 4, President Obama invoked executive recess appointment authority to place former Ohio attorney general Richard Cordray as the first director of the new Consumer Financial Protection Bureau, as well as to place three new members of the National Labor Relations Board. Senate Republicans had previously refused to permit a confirmation vote on Cordray and one of the president's NLRB appointments.

The president's action was controversial because the Senate was technically not in recess -- having held "pro forma" sessions that appeared to prevent the President from exercising his constitutional recess appointment authority. White House lawyers advised the president that he had the constitutional authority to make recess appointments while the Senate is hosting "pro forma" sessions only for the purpose of blocking those appointments. The Department of Justice defended the legal authority of the President in a memorandum.

Various legal scholars in turn reacted to the president's action: Professors John Yoo and Laurence Tribe, on opposite sides of the issue, examined the scope of executive authority and congressional authority under a separation of powers framework; and Professor Richard Epstein looked to the text of the Recess Appointment Clause and challenged not just President Obama's appointments but the current practice of recess appointments more broadly.

This week on Point of Law, we are fortunate enough to host a lively back-and-forth discussion with Jason Mazzone, Gerald Baylin Professor of Law at Brooklyn Law School and Andrew M. Grossman, visiting legal fellow in The Heritage Foundation's Center for Legal and Judicial Studies and litigator at Baker & Hostetler. Mr. Mazzone and Mr. Grossman will explore the constitutionality of the president's controversial recess appointments, exploring legal arguments that have been advanced in the debate and others not yet expressed. The featured discussion will be available below; please check back throughout the week as the discussion continues.

Jason Mazzone
Gerald Baylin Professor of Law, Brooklyn Law School

Earlier this month, President Obama, invoking his power to make recess appointments, named Richard Cordray director of the Consumer Financial Protection Bureau and added three members to the National Labor Relations Board. Critics contend that these appointments were unconstitutional because the Senate was not in recess: although virtually all Senators were out of town and no business was being conducted, the chamber was kept open through pro-forma sessions.

I am no fan of recess appointments particularly when, as here, they are used to put into office nominees the Senate has had before it but has refused to advance to a vote. Nonetheless, the President was on solid constitutional ground when he determined that not withstanding the pro-forma sessions, he could make use of his appointment power. To see why requires shifting the focus from the CFPB and the NLRB and onto the bigger stakes.

The Constitution is a document for times of war as well as times of peace. Many of the Constitution's provisions are explicitly directed at matters of national security; many other provisions serve a security function. The President's "Power to fill up all Vacancies that may happen during the Recess of the Senate" is a power that plays an important national security role by ensuring that even in times of war or other national crises high-level governmental offices remain staffed and functional. The power is located in section 2 of Article II of the Constitution, along with other presidential powers (to act as Commander in Chief, to make Treaties, to appoint Ambassadors, public Ministers and Consuls) that secure the nation. Early interpreters of the power emphasized its security role. For example, in 1823, Attorney General William Wirt, invoking military analogies, explained that were the President dependent upon the resumption of the Senate, a vacancy could "paralyze a whole line of action in some essential branch of our internal police."

Allowing the Senate to block presidential use of the appointment power with pro-forma sessions (the equivalent of an "In Session" sign on the door of a vacant chamber) would have grave security implications. In assessing President Obama's recent use of the power, we should ask about the scenario that is at the heart of the Recess Appointments Clause.

Consider this: While most Senators are in their home states, terrorists attack Washington, DC, with a dirty bomb. Cabinet officials and heads of federal agencies charged with the response effort are killed. A lone Senator bangs the gavel in an otherwise empty chamber and calls the body into pro-forma session. It would be foolish to say that the Senate has not recessed and thus the Constitution prohibits the President from replacing dead and wounded federal officers.

To be sure, the security of the nation does not depend upon staffing the CFPB and the NLRB. But the President's recess appointment power extends to filling "all Vacancies." And, as with other constitutional provisions, it is a mistake, and a danger, to measure that power by judging its perceived necessity in times of peace.

Andrew M. Grossman
Heritage Foundation Visiting Legal Fellow

Professor Mazzone's clever argument that, due to national-security interests, the President has the power to decree that Congress is in recess and make such appointments as he wishes explains too much, but unfortunately not the two things that matter: the constitutional text and structure.

Let's start with the text. Article II, section 2, provides that the President "shall nominate, and by and with the advice and consent of the Senate, shall appoint ambassadors, other public ministers and consuls, judges of the Supreme Court, and all other officers of the United States." The subsequent clause provides that the "President shall have power to fill up all vacancies that may happen during the recess of the Senate, by granting commissions which shall expire at the end of their next session." Yes, as Prof. Mazzone observes, these provisions in the same section as clause declaring the President "commander in chief"; for what it's worth, so are the provisions authorizing the President to seek written opinions of his cabinet and to "grant reprieves and pardons." Proximity only proves so much.

The challenge of interpreting the Constitution's "odd clauses" is to give them meaning consistent with text and history, without rendering any a nullity. Prof. Mazzone, as well as the Obama Administration, run aground on a few well-marked shoals:

First, let's start with the big-picture view: if Congress can pass a bill, it must be in session. Congress did, in fact, pass a bill during one of the "pro-forma sessions" that the President now claims may actually be a recess. But guess who signed that bill into law . . . . (And once before, in August.) For purposes of passing legislation that he supported, the President accepted pro-forma sessions as what they purport to be: active sessions. Either that, or he simply deferred to Congress's view on the matter.

Second is the requirement in Article I that neither chamber shall, "without the consent of the other, adjourn for more than three days." The House craftily wielded this provision to deny the Senate permission to adjourn. But the President's action, if upheld, would render it a nullity--the Senate could adjourn whenever it likes. Up until now, pro-forma sessions had always been considered sufficient to satisfy this requirement, as well as to satisfy the Twentieth Amendment's mandate that Congress assemble each year on January 3.

Third is the inconvenient case of the "pocket veto." Although a bill passed by Congress but not signed by the President becomes law "within ten days (Sundays excepted) after it shall have been presented to him," that same bill is regarded as vetoed when "the Congress by their adjournment prevent its return." Does a pro-forma session prevent a President from exercising a pocket veto? Yes, most certainly, so long as Congress made arrangements to receive messages from the President. (Wouldn't a parallel requirement go a long way toward satisfying Prof. Mazzone's national-security concerns?)

Fourth, what about Congress's power to "determine the rules of its proceedings"? Typically, the other branches honor its determinations and judgments as to its own actions. For example, when Congress certifies that a particular bill has been enrolled, the courts will presume that Congress observed the requisite procedures in passing it. To be sure, this power isn't absolute--Congress couldn't, for example, originate a tax bill in the Senate--but this is not a circumstance where Congress attempts to act in a manner plainly opposed to constitutional mandate.

Prof. Mazzone's suggestion that the Recess Appointments Clause must be construed broadly in light of the President's responsibility for national security does not answer these points. Nor does it account for the existence of that provision of Article II, section 3, which provides that the President may adjourn the House and Senate "to such time as he shall think proper"--a power that no President has exercised due to its enormous political costs outside the unusual type of crisis context that Prof. Mazzone conjures up. (Then again, others differ in their evaluation of the political costs.)

But let me conclude with two questions for Prof. Mazzone. First, is your reading of the Recess Appointments Clause limited, as some say the text requires and as your rationale would seem to imply, to vacancies that arise during a recess? And second, let's modify the hypothetical: the terrorists attack when every single member of Congress is in town, but partisan discord is such that the Senate, meeting six days each week, is unable to confirm a single nominee over a period of months. In that case, can the President cite national-security needs and make a recess appointment late on a Saturday night, when not even the C-Span cameras are stirring? And please no cop-outs that it's non-justiciable, because I don't buy it.

Recess Appointments: Who Decides?

January 25, 2012 8:15 AM

Jason Mazzone
Gerald Baylin Professor of Law, Brooklyn Law School

I appreciate Andrew Grossman's thoughtful comments on my remarks on Recess Appointments and National Security. Yet I searched those comments in vain for a plausible solution to the problem I raised: unless the President can make use of the Recess Appointments Clause, the pro-forma Senate, in which Senators are dispersed and no business is conducted, will leave the country unable to respond effectively to security problems or other national crises.

The sole specific suggestion that Andrew (if I may) offers is a pocket-veto-like scenario, with no basis in the text of the Constitution, in which the Senate would transmit appropriate messages to the President. In other words, rather than expeditiously appoint the people to distribute the gasmasks, the iodine pills, and the vaccines, the President should wait for the Senate to send word that when it said it was in pro-forma session it was only kidding. This is not a basis on which the Republic is secured.

In place of confronting the security origins of the Recess Appointments Clause and the security implications of his vision of a permanently-in-session Senate, Andrew returns the interpretive task to ordinary politics. His Constitution is one for the vast bureaucratic state in which constitutional interpretation should focus on the selection and control of peacetime functionaries. My Constitution is one that begins instead with the first duty of government, security. For without well-functioning mechanisms to ensure the security of the state and of the people, there is little point talking about which bureaucrat will head the CFPB or serve on the NLRB.

Andrew's peacetime Recess Clause is a dangerous creature for another reason. The failure to take account of security concerns risks generating constitutional rules and theories that are impractical when emergencies do arise, lending unintended legitimacy to government officials who ask to suspend normal constitutional constraints in response to security risks.

Andrew asks two questions. The first, whether the President's power is limited to vacancies that arise during a recess, is one many others have discussed and I will leave for another day. The second, in which Andrew proposes his own hypothetical security scenario, leads me to a broader issue, one that has received less attention and with which it is useful to end.

Given that there are plausible arguments on both sides about the constitutionality of recess appointments during pro-forma sessions, we are left with a puzzle: who decides whether the Senate was in fact in session? Andrew's arguments assign that decision at various points to the Senate, the House, the courts, and even--with Andrew's invocation of the payroll tax cut extension--President Obama himself. (I suspect the last of these is accidental.)

In instances such as the recent events on which this debate is focused, I would defer to the President on the question of whether the Senate is in session. The reason is simple. While government officials deciding upon the scope of their own powers present some obvious dangers, the Recess Appointments Clause contains its own check on executive abuses: commissions that the President grants pursuant to his recess power expire at the end of the next senatorial session. The Clause therefore protects to a large degree the interests of the Senate.

There is a further lesson. The expiration date underscores the temporary, emergency nature of the Recess Appointments Clause. This, as I have urged, is the essential feature that any account of the President's recess power must confront.

If the Professor insists...

January 26, 2012 8:25 AM

Andrew M. Grossman
Heritage Foundation Visiting Legal Fellow

The Constitution is the operating manual for a political machine, a federal government. Why, then, should we be surprised when the answer to some really hard question is to let politics run its course?

I'd say we shouldn't, because the Constitution leaves most things to politics, and that's true for Prof. Mazzone's insistent hypothetical. To recapitulate: Congress is out of town, terrorists kill the federal officials who would have led our response to a terror attack, and the Senate is holding pro-forma sessions to block nominations. Whatever does the President do?

To Prof. Mazzone, this conundrum proves that the President can declare that Congress is out of session--no matter what Congress thinks of the matter--and make whatever appointments he wants.

Well, I offered one out to Prof. Mazzone, but he didn't bite. Article II provides that, if the two chambers of Congress can't agree on when to adjourn--as happened in December and this month--the President can "adjourn them to such time as he shall think proper." Doesn't this power directly answer Prof. Mazzone's hypo? (Let's put aside, for the moment the question of whether an "adjournment appointment" is just as good as a "recess appointment.") The only problem is the President would have to accept the political cost, but he has no constitutional right to avoid that.

But let's tweak the hypo a bit. Maybe the House and Senate are politically aligned against the President, so there's no disagreement on adjournment. Or let's say the Supreme Court ruled just last week that "recess appointments" can't be made during adjournments (i.e., within sessions) but only during recesses (between sessions). We're doomed, right?

I wouldn't see why. Isn't the obvious answer either that (1) Congress would vote to recess immediately so the President could do what needs to be done or (2) the Senate would stream back to Washington to confirm the President's nominees so quickly they'd get whiplash?

It's silly to assume that it would be otherwise, but it's even sillier to use that mistaken assumption to justify putting a thumb on the scale of constitutional interpretation, where the President gets to override all because, well, one day his political opponents would block him from doing very important things. Congress could hobble our national security just as well--if not better!--by denying appropriations for defense, deauthorizing the national security programs, and even sending home the troops. Defunding might only take half of the House or a third of the Senate, while the others might require a two-thirds vote to override the inevitable veto. But if you've got two-thirds on your side, why not go ahead and impeach the President?

So if I understand Prof. Mazzone's "commander-in-chief canon" of construction correctly, this means that, notwithstanding the text of the Constitution, the President gets to make appropriations (remarkably, President Obama toyed with the idea of claiming this power to himself, albeit for very important reasons other than national security), authorize federal activities, muster an army and a navy, and ignore his own impeachment--all because Congress otherwise might prevent him, one day, from responding to a terrorist attack.

One plus is that this canon is really easy to apply--much easier than trying to unravel original meaning!--but it also transforms our federal government into precisely what it was not meant to be: a monarchy.

Of course, I don't really think that's what Prof. Mazzone was getting at. But the point is that he isn't applying a workable neutral principle of constitutional interpretation.

So I will: interpret the constitutional text as it was originally understood, with an eye to structure and purpose. In this view, there's no real indication that the Recess Appointments Clause was intended at all as a means for the President to check Congress's power but was just a gap-filler, an answer to the question of how the President might make an appointment when Congress was gone for months on end. This was a specific and narrow exception to the general rule that the Senate gets to vote on the President's nominees.

This doesn't mean that the President is powerless to act in times of emergency and senatorial intransigence. He has an extremely powerful check over the Senate: a political check. That, in some instance, the President may not wish to spend his political capital on getting his nominees confirmed is no good reason to turn the constitution on its head.




Rafael Mangual
Project Manager,
Legal Policy

Manhattan Institute

Published by the Manhattan Institute

The Manhattan Insitute's Center for Legal Policy.