Contingency fees: format, links down
By James R. Copland
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.
“Early Offers:” A Proposal To Counter Attorney Fee Gouging By Aligning The Contingent Fee System With Its Policy Roots And Ethical Mandates
By Lester 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
By Richard Painter
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
By Lester Brickman
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:
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).
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.
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
By Richard Painter
Professor Brickman once again makes cogent and well reasoned arguments in favor of the “early offer” proposal. While I am not opposed to that proposal, I am concerned that it will continue to run into political obstacles not just because it is opposed by the plaintiffs’ bar, but because other features undermine its appeal to voters and legislators normally predisposed to favor contingent fee reform. Chief among my concerns are:
* Early offers under the proposal are preceded by a moderately complex early discovery procedure that could itself be the subject of disputes between the parties. Disputes over “early offer” discovery could bog down settlement negotiations and make resolution of tort claims more difficult. These early discovery provisions also make the proposal more difficult for legislators and voters to understand, and make it vulnerable to “what if” questions in which opponents of the proposal demand that its supporters describe what would happen under various scenarios in which early discovery rules are not complied with in letter or spirit. It is important to recognize that the existing system in which many tort claims are settled early, without much discovery or dispute over discovery, saves time and expense. This system arguably should not be changed simply because early discovery allows parties to negotiate settlement on a more informed basis. In any event, the timing of discovery is a separate issue from the reasonableness of legal fees, and the two issues arguably should not be entangled as they are in the early offer proposal.
* Professor Brickman makes compelling arguments that the risk assumed by a plaintiff’s lawyer in litigating a contingency case is directly linked to the amount the defendant is willing to pay to settle the case early on (the higher that amount, the lower the lawyer’s risk). Professor Brickman’s answer is to tie the lawyer’s fee to improvement on this amount as the case moves along after a settlement offer is rejected. While theoretically sound, the problem with this approach is that it allows defendants, by making or not making settlement offers within the framework of the proposal, to determine the size of plaintiffs’ lawyers’ fees. This gives rise to possible collusion between defendants and plaintiffs’ lawyers (e.g. defendants who do not make early settlement offers that trigger the proposal, or who make very low offers, and plaintiffs’ lawyers who return the favor by recommending that their clients accept low settlement offers later on). Linkage between contingent fees and defendants’ settlement posture also makes the proposal politically vulnerable because it injects defendants into plaintiffs’ relationships with their lawyers (opponents will run political ads saying that “when you are injured, under this proposal the other driver’s insurance company, not you, gets to decide how much your lawyer gets paid”). This bolsters claims of those who argue that contingent-fee reform is really about helping defendants rather than helping plaintiffs avoid paying too much to their lawyers.
A few more general observations:
* Contingent fee abuse could be pervasive throughout the plaintiffs’ bar, as Professor Brickman argues, or, as I believe, a serious problem that arises in a relatively small portion of cases and that unfairly inflates the incomes of a relatively small portion of plaintiffs’ lawyers. This debate largely turns on statistics, and I have seen statistics that support each side. I should only point out that most statistics on median incomes of plaintiffs’ lawyers (which I cite in my report for the Manhattan Institute on the New American Rule) do not reveal figures that are particularly shocking or that plaintiffs’ lawyers as a whole are overpaid for the role they perform in our civil justice system. It is, however, telling that some statistics (also cited in my report) show mean incomes for plaintiffs’ lawyers that are significantly higher than the median, meaning that there is a lot of money being made by relatively few lawyers on the high end. Some of this mean/median differential is because some very good lawyers earn a lot (e.g. Corboy & Demetrio), but the mean is also driven up when contingent fees are excessive in a small but significant number of cases, unfairly enriching some lawyers (e.g. Dowd). Regardless of our disagreement over the breadth of the contingent fee abuse problem, Professor Brickman and I agree about its depth and the injury that it does to the reputation of the legal profession.
* If most plaintiffs’ lawyers do in fact make relatively modest incomes, or legislators and voters perceive most plaintiffs’ lawyers to make relatively modest incomes, contingent fee reform will be difficult to accomplish if cast as part of a general attack on plaintiffs’ lawyers’ fees. This is particularly true in today’s environment where corporate lawyers, not plaintiffs’ lawyers, have been characterized as enriching themselves at the public’s expense, and plaintiffs’ lawyers argue that their work is necessary to protect the public. Whether true or not, such arguments have political resonance. My own view is that contingent fee reform does not require a general attack on levels of compensation for the plaintiffs’ bar, and if carefully implemented would not drive down the annual incomes of most plaintiffs’ lawyers. The target is instead a select one: unfair practices that allow some lawyers to take too much money from their clients in some cases. These relatively few lawyers who are unjustly enriched may be politically powerful if they also make large campaign contributions, but they are not necessarily popular. Once it is understood that contingent fee reform would benefit not only plaintiffs but also most lawyers by improving the reputation of their profession, opposition to reform should be easier to overcome.
* Professor Brickman points to a number of factors that may impede fair pricing of contingent fees, but in my view the most salient factor is information asymmetry. Plaintiffs’ lawyers know more than their clients do about the admittedly uncertain factors that determine the reasonableness of a contingent fee: the size of a likely judgment or settlement if a case is successful, the chances of success and the amount of lawyer time likely to be required. The New American Rule addresses this information asymmetry by requiring lawyers to disclose an hourly rate above which their fee will not go. This rule applies regardless of whether the defendant offers to settle the case, keeping the defendant away from the outcome of lawyer-client fee negotiations. The proposal instead allows the plaintiff to decide, after hearing how high the lawyer’s fee could go on a per hour basis, whether to hire that lawyer or a different one. Finally, the proposal cannot possibly be characterized as doing away with contingent fees, except of course those charged by a lawyer who wants fees that would translate into an extraordinarily high amount of money per hour and cannot justify this amount to his client. That lawyer should not be representing the client to begin with.
Once again, the early offer proposal is in many ways a good one, despite its disadvantages. The New American Rule, however, is less complex in its procedural aspects, is not contingent on discovery, involves bilateral negotiations between the plaintiff and the lawyer alone rather than triggering mechanisms controlled by the defendant, and limits contingent fees in all cases, not just those in which a settlement offer is made. For these reasons, the New American Rule also is worthy of serious consideration.
A brief rejoinder
By Lester Brickman
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.
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THIS MONTH'S DISCUSSION'S ENTRIES
Contingency fees: format, links down, James R. Copland, August 17, 2004, 10:52 AM
“Early Offers:” A Proposal To Counter Attorney Fee Gouging By Aligning The Contingent Fee System With Its Policy Roots And Ethical Mandates, Lester Brickman, August 17, 2004, 11:46 AM
On fees and markets, Richard Painter, August 18, 2004, 03:54 PM
Professor Brickman responds, Lester Brickman, August 19, 2004, 06:25 PM
Less complexity, more information, Richard Painter, August 24, 2004, 09:30 AM
A brief rejoinder, Lester Brickman, August 26, 2004, 11:39 AM
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