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Recently in Statistics/Empirical Work Category

How Judicial Elections Bias the Courts

January 10, 2005 12:20 PM

Dear David,

My research on judicial elections was provoked by this remarkable quote from retired West Virginia Supreme Court judge Richard Neely:

As long as I am allowed to redistribute wealth from out-of-state companies to injured in-state plaintiffs, I shall continue to do so.  Not only is my sleep enhanced when I give someone's else money away, but so is my job security, because the in-state plaintiffs, their families, and their friends will reelect me. Neely (1988, 4).

A typical plaintiff sues where he lives while a defendant may be a corporation that is headquartered out-of-state, perhaps even out-of-country.  Neely suggests that in these cases, elected judges will be biased towards plaintiffs - high awards are a judge's way of performing constituency service.

Furthermore, where do elected judges get most of their campaign funds?  Answer: from lawyers. Plaintiff's lawyers usually get the bad rap but even defense lawyers like to see judges who grant large awards because this drives up the demand for their services.  (A defense lawyer wants a small award in his case but he wants to operate in a field where awards in general are high.)

Eric Helland and I put these ideas to the statistical test.  Using a sample of more than 50,000 tort cases, we found that the average award against an out-of-state corporation relative to an in-state corporation is much higher (between two and four hundred thousand dollars higher) in states that select their judges using partisan elections than in states using appointment or other systems.  (Our paper from the American Law and Economics Review can be found here; email me if you can't access the journal's website and would like a copy.)

Our research suggests that judges respond to incentives just like other politicians - which raises the question, What sort of incentive structure do we want judges to have?  Appointment?  Election?  Life-time or short-term tenure?  Should campaign finance laws be stronger for state-court judges than for state representatives?  Should we rely on Federal judges more than State judges?  Our research focuses on torts but these issues also have implications for criminal law and the role of judges in Federalism.

I'm looking forward to your insights.

Alex


Jury Problems and Law Problems

January 24, 2005 11:22 AM

Dear David,

I will make just one more point before signing off. I worry not so much about juries deciding cases wrongly as about juries deciding wrong cases. The problem, in other words, is not juries per-se but the combination of juries with the expansion of tort law into areas where choice, contract and legislation more properly belong.

Thanks David for a stimulating discussion!

Best

Alex

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.

Alex,

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.

Alex,

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

Alex,

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


Where

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.

Opening thoughts and questions

April 13, 2011 6:08 AM

I'm  excited to see what some of our guests have to say on the pending Supreme Court case, Wal-Mart v. Dukes, which is in essence the mother of all employment-law class actions. Richard's piece is a good start, fleshing out how two areas of law -- employment discrimination law and class actions -- come together here. I'll start with a few questions, pulling out the key issues as I see them:

  1. The class action rule at play. When I wrote about this case after initial reports that it was certified at the trial-court level, I noted how it didn't fit under a traditional 23(b)(3) schema. Of course, as is now obvious, the certification rule at play isn't (b)(3) but rather (b)(2). It would seem to me that using (b)(2) here is disingenuous. To begin with, it's hard for me to see how the damages at issue here don't force this case into a (b)(3) framework. Even Justice Ginsburg -- hardly a critic of litigation generally or employment-discrimination litigation specifically -- seemed to recognize in oral argument that there's a pretty serious issue about how to handle the damages phase in a way that doesn't adversely affect the interests of many (realistically thousands or hundreds of thousands) of class plaintiffs. Doesn't using (b)(2) here swallow the (b)(3) rule? And if so, wouldn't (b)(3) be somewhat superfluous, at least in similar types of cases? And even under a (b)(2) rationale, the injunctive remedy isn't at all clear here; it's a far cry from the nuisance abatement scenario Richard describes, and short of Wal-Mart completely centralizing and reconstructing its hiring practices, under court supervision, how exactly is an injunction supposed to work?   I'd be very interested in hearing more about these issues from some of our experts more versed in class-action practice.
  2. Expert evidence at the class certification stage. A key question before the Court is of course the degree to which it's proper to rely on the plaintiffs' expert evidence to establish their theory of the case, both to establish that discrimination exists and to tie it somehow back to Wal-Mart, with respect to all of its female employees. If Daubert review isn't appropriate at the class-certification stage, I don't see how any court could evaluate claims in a case like this: effectively, any employer likely has some gender or race or other disparity in its hiring or promotion patterns, and it's always possible to concoct some theory to explain such disparities. Don't we have to have some standard to evaluate such claims before launching a class-action claim that could leave an employer's hiring practices under court control?
  3. How this case intersects with "disparate impact" in employment discrimination cases. I think Richard is right to focus on disparate impact here. As some of the justices suggested at oral argument, there's some tension in the plaintiffs' theory: on the one hand, Wal-Mart is responsible for gender disparities in promotion and pay across all its stores nationwide; but it's responsible under the theory that its promotion and pay practices are too decentralized, leaving decisions up to individuals who are, at least in some cases, likely to be governed by prejudice. Isn't this rationale just a backdoor way to solidify a disparate-impact standard -- requiring that large employers centralize decision-making to avoid disparities in hiring, pay, and promotions? How does the theory here jibe with the Supreme Court's rulings on disparate impact, such as the recent (race) case Ricci v. DeStefano?

So, at the outset, I have lots of questions. I look forward to fleshing them out.

 

 

 

FEATURED DISCUSSION ARCHIVE:


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

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

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

Published by the Manhattan Institute

The Manhattan Insitute's Center for Legal Policy.