Weekly Report #16

The regularly scheduled Weekly Report will not appear here today. Instead, I am going to use this space to engage in a conversation about the ethics of contingency fees with David Giacalone of prof. yabut's journal (f/k/a ethicalEsq).

What is a contingency fee? Easy example: You break your arm in a car accident and go to see a lawyer. He says, "I'll be your lawyer if you agree to pay me one-third of the total recovery, plus case costs. It you don't win, you won't owe me anything."

That's a contingency fee. Another simple explanation of contingency fees and case costs can be found on my firm's website.

To heighten the drama, I can summarize our opposing views like this: David thinks the contingency fee system is broken, and I don't. Or to put it another way, David thinks that the use of a "standard" contingency fee is often unethical, and I don't.

The summary was intended only to make this excessively long post more interesting. To find out whether the drama is real, here's what I'll do: (a) in an attempt not to put words into David's mouth, I'll provide links to posts in which David has stated his position on contingency fees; (b) I'll state my firm's policies concerning contingency fees; (c) I'll point out where I agree and disagree with David; and then (d) we'll all see where the discussion leads.

Outside the scope of this discussion is the idea, sometimes proposed in newspapers, that the contingency fee system fosters frivolous litigation and should be replaced with a "loser pays" rule. That's an interesting debate about an awful idea, but it will have to wait for another day.

(a) David's views on contingency fees can be found here:

6/03/03 "Using a Standard Contingency Fee Is Often Unethical"
7/16/03 "A Bar President Writes About Contingency Fees"
7/16/03 "Challenge to Public Citizen: Help Fix the Contingency Fee System (get the current rules enforced . . . )"

You should read David's posts yourself, but to put what I have to say next into context, I can summarize some of David's points as follows: (i) lawyers who charge the same contingency fee to all their clients are often unjustly enriched at their clients' expense; (ii) all clients should be advised up front that their fees are negotiable; and (iii) clients should be offered an opportunity to pay by the hour.

Again, however, this is my summary of David's ideas. If you are interested in the debate, you should read David's posts in full, and then return to see what he says here or on his own weblog. Now, to continue:

(b) I practice in Illinois and Missouri; this discussion is limited for brevity's sake mostly to Illinois. The Illinois ethics rule concerning fees can be found here. In both Illinois and Missouri, the fees I can charge are sometimes set by statute: Missouri work comp fees generally cannot exceed 25%; Illinois work comp fees generally cannot exceed 20%; Illinois medical malpractice fees cannot exceed one-third of the first $150,000 recovered, 25% of the next $850,000, and 20% of any amount over $1,000,000.

My firm's practice involves a wide range of cases, from the simple to the very complex--though none is ever "easy" to resolve. The firm's usual contingency fee is 33.3%. On the firm's website (link given above), we say this about the way we charge for a typical case:

We charge on a contingency fee basis, meaning that you will not pay us anything unless there is a settlement or a winning verdict at trial. Typically, when we win your case, our fee is one-third or 33.3% of the total recovery, in addition to "case costs." For some complex types of cases, we charge 40%.

(c) Here's where I agree and disagree with David. About the larger philosophical issues, I agree: a lawyer should not be unjustly enriched at the expense of his client. To put it another way, I have no interest in unjustly enriching myself at the expense of my clients.

In practice, however, things are a little more complicated. First, to my mind, my firm abides by the ethical rule that its fees must be reasonable. We generally charge 40% for products liability cases and a third for most others. Even so, there are unusual cases in which we have charged less, even much less. Theoretically, someone could come to our office having sustained a serious brain injury after a drunk driver ran a stop sign and hit him in a crosswalk. In that situation, a fee of one-third fee might be too high, depending on various other factors.

In real life, however, we don't get cases like these. All of our cases are "hard" and "risky" cases, in the sense that insurance companies, no matter how clear the liability, simply will not pay a reasonable amount (or any amount at all) until we have demonstrated that we are willing to go to trial. Ours is a practice in which we assume that every personal injury case will be tried; this means some cases might take years.

Here are some more caveats about our fees: If an insurance company has already made an offer before the client comes to us, we generally don't take a fee on that part of the recovery. While cases are sometimes settled "early," this is only because we have done significant and important work on the case. Finally, we sometimes reduce our fee late in a case in order to accomplish a settlement that makes the client happy. This is a common practice among lawyers, but does not mean that the original fee was unreasonable; it means lawyers care about keeping clients happy.

Do we advise new clients that they should negotiate their fee with us? No. Some clients do want to negotiate, but after we have listened to the facts and decided on the fee, we are usually not willing to change our minds. Instead, we tell clients who think that our fees are too high that they should talk to a few other lawyers, and then come back if they want.

Do we offer our clients an opportunity to pay by the hour, rather than enter into a contingency fee arrangement? As a general rule, no. This usually doesn't work very well. For example, it creates consternation in the client whenever we work on his case. It also sets up the particularly uncomfortable situation of having to seek withdrawal from the case when our bills aren't being paid. We are especially mindful of this difficulty because the client often stops paying just before trial, a time when the judge might not allow us to withdraw.

Finally, I reject these assumptions, to the extent David is making them: (a) that there are easy cases that settle quickly for reasonable amounts; and (b) that I have a duty to take on every client that walks in the door. As for the second point, though I care deeply about victims in general, I am also running a business, and if it doesn't turn a profit I cannot provide for my family. Therefore, I do not feel I have a duty to take any particular legal case. I immediately reject all cases that I think are frivolous, that I think will end up costing more money than will likely be recovered, or that I think are unsuitable for some other reason. This is at least 75% of all cases. I spend a lot of time rejecting cases; often, this is because the person on the other side of my desk has no business even thinking about a lawsuit. I tell him that, too, using phrases as pithy as those employed by any tort reformer.

(d) Where will this discussion lead? You'll have to wait and see. (Concluding note to David: Since most of my weblogging time for the weekend has been exhausted, I reserve the right not to respond to you until next week.)

Comments

[Beldar]

A pair of personal anecdotes about contingent fees:

(1) Several years ago, I defended a publicly traded company in a bet-the-company securities fraud case that concluded in a six-week jury trial in state district court in Houston. The plaintiffs were two offshore investment trusts whose beneficiaries were a set of wealthy Middle Eastern families, and they hired the largest law firm in Texas to represent them. The law firm thought highly of the case, and several times offered to handle it on a negotiated contingent fee basis (probably for something far less than the quote-unquote "standard" one-third). But the plaintiffs refused; they also thought highly of their claims, and thought they'd come out far ahead by paying their law firm's hourly rates — even though those rates were at the very top of the Texas market, and the firm in question is well known for, shall we say, fulsomely staffing its cases, leaving no stone unturned (or legal or factual issue unresearched), and very aggressively capturing every billable hour.

More than 30 different lawyer and paralegal timekeepers ended up billing to the file, and based on their firm's standard hourly rates, the plaintiffs sought an award of more than $1.5 million in attorneys' fees at the trial.

The jury ended up answering every single question submitted by the court against the plaintiffs — including the question on "reasonable attorneys' fees" (which they wouldn't have received anyway, being the non-prevailing party), which the jury assessed at $0.00. My opposing counsel counted themselves lucky indeed that their offers to handle the case on a contingent fee had been rejected, and I've no doubt that despite their loss, they collected 100 cents on the dollar for every hour they billed.

(2) One of my current firm's longstanding clients, a small businessman, had gotten far behind on our hourly-rate bills for the docket of small commercial cases (many of them collection cases) we handled for him. Rather than withdraw from our pending cases, we negotiated a deal with him whereby in exchange for our writing off all his outstanding bills, he assigned us a 100 percent contingent interest in the single best case we were handling for him. Thus incentivized (to use that ungainly verb), our very aggressive and creative lawyering resulted in a prompt settlement of that case for 100 cents on the dollar on the principal amount of his claim (his former customer's unpaid invoices to him), plus interest, plus attorneys' fees at about 90 percent of our regular hourly rate.

By definition, on that one case, then, we were significantly overcompensated through the spectacular result we'd achieved (although the total award only ended up being only slightly more than our client's unpaid bills to us for all his outstanding cases). The client — far from being upset that we'd gotten a windfall off "his" case — was extremely satisfied with the "moral victory" we'd obtained for him over his foe. And he was so sufficiently impressed with this demonstration of our services and capabilities that he started paying us in full, at our regular rates and on a timely basis, on the remaining docket of his cases that we've continued to handle.

I don't know what the moral is of either of these two anecdotes. As far as I'm concerned, they're just data points in the macroeconomic analysis, and of course, neither of them is particularly relevant to the architypical plaintiff's personal injury case. I could certainly recount other personal anecdotes to support — or refute — almost any arguments I've heard or read either for or against contingent fees in general. Personally, on the whole, I'm pretty much a believer in trusting basic market forces to provide a better macroeconomic result than any attempts to regulate or legislate on contingent fees would be likely to produce.

[David Giacalone]

Evan, Thank you for responding to my request(s) for your perspective on using the standard contingency fee. Having just spent far too much time on a lovely Saturday, posting on Law Day, Not Lawyers' Day, I am also in no position to respond at great length [cheers from your visitors!!].

I will say, however, that you have done the very lawyerly thing of not really responding to the crux of my arguments -- if the size of contingency fees (as compared to hourly or flat fees) are ethically permitted premised on the amount of risk taken, how can the maximum permitted by law or regulation be the usual (virtually only) percentage charged by p/i lawyers?

I have recently discussed the small amount of risk that exists in most p/i practices in this posting - Where's the Risk, which cites lots of (very persuasive) sources.

I had hoped that you'd explain why ABA Ethics Opinion 389 is wrong, since it requires both informing the client of the right to negotiate fees whenever a contingency fee is sought by either lawyer or client (with a full explanation of the risk level and factors as perceived by the lawyer), and setting the fee percentage according to the risk level.

Please be assured that I have NEVER believed or suggested that any p/i lawyer has to take every client who walks in the door -- as you suggest, it would be unethical to take frivolous cases; plus, there are some nonfrivolous cases that a lawyer could feel are likely to take up more hours than can be justified or possible within the particular law practice.

I am asking whether the clients that are taken represent a risk level that warrants fee levels that work out to be much higher than would be charged if an hourly rate were used. Also, I am saying that each client deserves a rate tailored to that client's case.

Having only recently retired from the ethics-nanny role, I am going to retire to a nice nap right now. Thanks again for being willing to dialogue on this topic.

P.S. I just quickly read Beldar's comments. I am also a big fan of market forces, but faith in the market is only justified when the buyer is well-informed. Opinion 389 tried to make sure that lawyers give personal injury clients enough information to make the fee-setting arrangement fair. P/I lawyers have made most of the public believe that they have no choice but using the standard contingency fee level. That ignorance yields skewed results -- all in favor of the so-called fiduciary. That's why I believe we must make sure each client knows that he or she has the right to negotiate fee percentage, and the right to enough information from the lawyer so as to negotiate intelligently about the risk level (a good faith estimate of the likely range of hours needed and chances of a award and recovery). It is difficult for me to see how the lawyer-fiduciary could do less.

As Beldar knows, the debate is not about individual anecdotes. It is about the duties of the individual attorney to the individual client.

[Evan]

Beldar and David:

Thanks for the comments.

As for you, David, I'll respond as fully as possible to your comment, but probably not until next week. In the meantime, I am going to think more about what you mean by the concept of "risk"--it seems to me it's sort of hard to quantify. While chiding Beldar about the limited usefulness of individual anecdotes, you cite (in your linked post) an individual anecdote about a personal injury firm that claims to rarely lose a case. You imply that their risk is close to 0, so their fee should be lowered accordingly. But how much money does that firm put into each case? We don't know. How much time do they put into a case before it settles, even if they're certain it will settle?

Instead of risk, is it more useful to talk about return on investment? If so, what's an appropriate r.o.i. for a plaintiffs' firm? Should it be less than that of a civil defense firm? (I'm thinking out loud at this point.) Is part of your complaint about contingency fees that plaintiffs' lawyers make too much money?

Some defense lawyers make a lot of money too. But do plaintiffs' personal injury lawyers make a lot, or is that just a generalization? Every city has a few very "successful" p/i lawyers; but for every one of those, there are many more you don't hear about who are barely getting by. Many more of the latter than the former; it's incredibly difficult to make money as a plaintiffs' lawyer, despite what you read in the newspapers.

If one of your objections is that plaintiffs' lawyers make too much money, how do you feel about doctors? (Sorry to bring doctors into this.) Some would say doctors perform a useful service and deserve to be paid very well, while plaintiffs' lawyers are more akin to leeches---I don't mean you would say this, David, although there is a little plaintiffs-lawyers-make-too-much-money reasoning running through your arguments, in my opinion.

As is true of some doctors, I think many plaintiffs' lawyers provide a useful service to society--e.g., see Paul Brodeur on the asbestos litigation, for example. I could cite many other examples. Does this mean the best plaintiffs' lawyers should be compensated as well as the best doctors? Today in the Alton, Illinois, newspaper, there is an article about a local doctor whose chief complaint about high malpractice rates is as follows: he had tell sell his condominium and boat at the Lake of the Ozarks. Believe me, people won't laugh at this, as they should; rather, they'll feel sorry for the poor condominium-less doctor. Moreover, if they were asked who is to blame for this doctor's great tragedy, they'd blame the "greedy trial lawyers."

Why does it sometimes seem that only plaintiffs' lawyers are criticized for using their education to support themselves? . . . But here I am, ranting again. I apologize. I fully admit, David, that the most direct route to answering your questions about contingency fees is not by way of complaining about doctors. So I'll begin some self-editing and get back to you later . . .

[David Giacalone]

I promise (myself) this will be my last Comment on this topic for the weekend. I believe that far too often, p/i lawyers insist on, and take, far too much of the money meant to compensate their client for a personal injury, compared to the effort expended and the very small risk that they would not be paid. (Could the extra roi be why p/i lawyers are willing to pay referral fees and use expensive advertising, but other lawyers don't?) The fact that other lawyers convince their (usually corporate) clients to pay them very large fees, can in no way justify placing a Lawyer Tax of 33% on virtually every injury award Joe Every Client receives.

Have you noticed that there appears to be no shortage of plaintiff's lawyers willing to handle the p/i cases that have statutory limits of 25% contingency fees? Where did the magic 33% and 40% come from?

Yes, the posting about C&M focused on one law firm that claimed a 98% win rate, but the principle discussed is far broader, and the piece also had this quote:

[S]ee the discussion here of Prof. Lester Brickman's law review article, Effective Hourly Rates of Contingency-Fee Lawyers: Competing Data and Non-Competitive Fees, 81 Wash.U.L.Q. 653 (2003). Brickman shows that "tort lawyers prevail in approximately 90% of the cases they accept and obtain repayment of substantially all litigation expenses they advance, including expenses advanced in the cases where they do not prevail." And, he says:

"If a case is too risky, it is rejected. If it is lucrative, it is accepted, and a standard contingency fee is charged irrespective of whether there is any meaningful litigation risk and even though the cost of production of the service in no way justifies the enormous projected return on investment."

The fact that the win rate is on average so high indicates that p/i lawyers are very capable of intelligently assigning a perceived risk level to each case. What I can't understand is why the lawyer-fiduciary doesn't have an obligation to share that assessment with the client, nor the best guess at what the total hours expended will be, before entering into the fee arrangement and setting the percentage level.

Plaintiff's p/i lawyers often seem to get all pouty and act as if they are the only kind of lawyers who put out money during a case or who never get stiffed by a client for all or part of a bill.

As my writings and sources indicate, "risk" includes all the elements that go into determining whether the lawyer is likely to receive a reasonable fee in return for time and resources that are likely to be "invested" in the case. The mere fact that there is "some risk" cannot possibly justify reaping an effective hourly rate that is significantly higher than the lawyer could expect to charge, given his or her experience, skill, etc.

[Carolyn Elefant]

Beldar asks "I don't know what the moral is of either of these two anecdotes." Perhaps I do. Beldar's posts show that sometimes those who use a contingency fee come out on the high end, sometimes they don't. Except for the super-successful plaintiffs' lawyers who probably do make a bundle off most cases, the majority of PI attorneys are compensated well for some cases and not so well for others. It's the larger, easier cases that enable PI attorneys to handle the smaller or more risky ones.

Doesn't that mean that the clients whose cases result in overcompensation to attorneys are effectively paying for those clients where an attorney loses money or little more than breaks even? Yes, it does. But what's wrong with that? At large law firms, clients' hourly fees don't just pay for work performed by the attorneys. That fee includes overhead, that in turn pays for the firm's charitable works, for pro bono and associate training. No one - certainly not the tort reform attorneys - criticize that system. So what is wrong with a contingency PI practice where some client cases subsidize others?

Of course, I do agree, as David points out, that it is troubling that there is so little price competition amongst PI attorneys - most do seem to take between 1/3 and 40 % of the settlement amount. And most PI clients have come to expect that, so I don't know whether they actually shop around or are aware that they can ask to pay by the hour. But I don't see this as an inherent flaw in the contingency system but rather one that can be corrected by additional education.

[Beldar]

Another anecdote about contingent fees, and some further thoughts from it:

Several years ago, the firm at which I was then practicing represented a group of very sophisticated institutional investors in a bankruptcy/reorganization matter. During its handling, we and (promptly thereafter) they became aware of a potential eight-figure securities fraud lawsuit that they could file against a large and very solvent company which had not been involved in the bankruptcy/reorg matter. But a branch office of my firm had previously represented an affiliate of that company on entirely unrelated matters, and even though that representation had long since ended, we were uncomfortable pursuing the claim.

When we, in effect, disqualified ourselves from handling their newly discovered claim (essentially on "taste" rather than strict ethical grounds), our institutional investor clients asked us to recommend several Houston law firms for their consideration. Also at their request, we put together a summary of the facts that gave us grounds to believe there was a claim worth pursuing and forwarded them to five different firms who we'd recommended as potential counsel. As it turned out, all five firms reacted to these facts the same way my firm had, and accordingly were all very eager to take the case on a contingent fee basis. And so, finally, I coordinated the "beauty pageant" in which they pitched themselves and their plans for handling the case to the investor group.

The beauty pageant certainly included competition among the firms on the basis of their proposed contingent fee percentages, customized to this case. Some of the firms proposed "blended" fees — a reduced hourly rate coupled with a contingent fee interest — and they all proposed sliding-scale structures where the contingent percentage varied for different tiers of the potential recovery.

But by no means was the competition limited to fee terms. Each firm made representations about the team it proposed to assemble for the case, for example, highlighting not just the prospective "first chair" lawyers but his/her back-ups. The investor group solicited and closely considered my very subjective assessment of the firms' respective capabilities, asked each of the competitors about the others, solicited input from their respective trusted outside counsel in unrelated matters from other cities, and conducted extended interviews to form their own opinions.

Two firms dropped out of the competition, but three others stuck with it, and eventually the investor group selected and hired one of them. Roughly eighteen months later, however, the case settled for a very modest sum based on facts none of us had when we were doing our original assessment of the case — facts that made the defendant's position substantially stronger than we'd been able to predict. The firm selected by the investor group ended up taking a small bath on the deal, but that was the gamble they'd taken. I shed no tears for them — their portfolio of "investments" in other contingent fee matters was sufficiently diversified, and backed up with steady hourly-rate business, such that I'm sure none of the firm's principals ended up having to sell any condos.

Again, this anecdote has only limited usefulness for evaluating the "standard" personal injury case (if there is such a thing). The clients were extremely sophisticated, and had not only the knowledge but the resources (effectively paying me as their lawyer for purposes of hiring another lawyer) to make a very well-informed decision that certainly reflected efficient market forces. Viewed from one angle, it's an example of how competition among lawyers on contingent fee rates can be beneficial to clients.

But these clients also were wise enough to recognize that price isn't the only material factor in choosing lawyers — it's merely the most objective. (By the way, "winning percentage" may seem to be a similarly objective factor like price; but any good trial lawyer will tell you the measure of a good lawyer is not how many cases he's won and lost, but how many he's won that he should have lost and vice versa.) This investor group was in a better position than most clients to gather information relevant to the more subjective factors and to evaluate that information.

It would be "nice" if all clients had the advantages this investor group did. But they don't. Thus, my impression is that for most typical clients, the existence of a more or less standardized contingent fee is sometimes a blessing, because it effectively forces them to pay attention to subjective factors that differentiate lawyers and law firms. For the average client, that may collapse down to a gut-hunch decision about which lawyer "feels right" for them. But such things, I believe, in general end up being far more important in determining customer satisfaction than price terms are, or even ought to be.

[Evan]

David: I think I owe you at least one more comment. (Meanwhile, I also want to say to Beldar and Carolyn that they should jump back into the fray if they'd like. I appreciate their comments, as well as those of anyone else who wants to add to the debate.)

David, you wrote as follows: "I had hoped that you'd explain why ABA Ethics Opinion 389 is wrong, since it requires both informing the client of the right to negotiate fees whenever a contingency fee is sought by either lawyer or client (with a full explanation of the risk level and factors as perceived by the lawyer), and setting the fee percentage according to the risk level."

I think that whatever its merits, ABA Ethics Opinion 389 would not work well in practice. For example, in your column at Halt, you write: "When the defendant is clearly liable and has deep pockets (or even adequate insurance), a reasonable fee should be significantly less than one-third, because the lawyer is taking a very small risk and is adding very little to the value of the claim." I disagree with this assumption. In my experience, even when the defendant is clearly liable, has deep pockets, and has engaged in egregious conduct, there is still a huge fight ahead. I mentioned this in my original post. The assumption that there are easy, risk-free cases, even in cases of clear liability, just isn't accurate, at least where I practice.

I also read the 84-page Brickman article to which you linked (although I have not yet read every word of every footnote). Most of Brickman's article is meant to dispute the findings of Professor Kritzer. All Brickman has to offer in Kritzer's place is a silly thesis that "the effective hourly rates" of tort lawyers "have increased by 1000% to 1400%" since 1960, based on the size of jury verdicts. Even if his analysis is correct, this increase doesn't mean what Brickman thinks it means.

During the last century, there was a great change in the way our society valued human life. In the 40s to the 60s, the value of a lost leg or a lost life was next to nothing, and there weren't any p/i lawyers as we think of them today. (I can cite sources if you want.) From the 60s to the present, we as a society have placed greater value on human life and limb--expressed as a percentage, this value may have increased by 1000% to 1400%. Is that a bad thing, even if it means there is a new type of lawyer called the "personal injury lawyer"?

Some think it's a bad thing--though I don't mean you, David. Still, there's something missing from your analysis (and from Brickman's): any evidence that the victims of negligent conduct are not being fairly compensated because they're having to pay their lawyers. It's what you call the "Lawyer Tax." Does this "tax"--the fee paid to lawyers in personal injury cases--prevent victims and consumers from being fully and fairly compensated? I think this is what you imply, but there's no evidence it's true.

You can have the last word. If I take this issue up again, it will be in a new post (probably).

[David Giacalone]

Evan, I literally do not have the energy to answer point by point (I wish I did). But, I have a few points and questions:

1)You seem to say that if there is any risk at all of not being fully compensated for your time or expenses, taking one-third or more is appropriate -- even if the resulting effective hourly rate seems excessive to any reasonable non-p/i lawyer, and would shock the client, if he or she knew. [Yes, you might have to work to "earn" the fee, but most other lawyers do exert some effort to make a living.]

2) You suggest that experiencd p/i lawyers are not capable of telling with fairly good accuracy which cases are likely to yield a very good roi. If they can make such risk assessments, what possible reason would there be not to share that assessment with the client? [P/i lawyers certainly share the glee with partners when the big, potential jackput walks in the door and signs up.] What is the justification for not reducing the fee significantly in the lower-risk cases? Your loyalty is owed to each individual client. How can every case warrant the maximum percentage allowed in the jurisdiction?

3) I don't think you've read Prof. Brickman's article closely enough.

4) If the p/i lawyer takes in more from a case than the risk level warranted, the Lawyer Tax is being paid by someone. Either the client is not getting his appropriate compensation, or the defendant is paying too much to over-pay the plaintiff's lawyer, or everybody who buys insurance is overpaying.

I have no problem with p/i lawyers existing. My problem is with their using a system that systematically overcharges individual clients. P/i lawyers seem to be saying "Look, by applying this great 'standard rate' formula, we figured out a great racket, so don't try to take it away. If we didn't have the chance to consistently make far more money than we would make working by the hour, we'd fold up our tents and go away."

For all the reasons that ethicalEsq recently went into retirement, I need to stop now.

[Kevin Heller]

Hey, did you guys know I r.a'd for Professor Brickman. See footnote.