It is only fitting that AEI’s Liability Project has released Two Cheers for Contingent Fees to
coincide with the Catholic Feast of the Assumption of the Blessed Virgin Mary (which celebrates
Mary’s having been “taken up body and soul into heaven upon her death”). Two Cheers is a
42-page monograph by Alex Tabarrok and Eric Helland (available here in pdf format), which
concludes that limiting the contractual rights of plaintiffs and their lawyers, by restricting the
size of contingency fees, “is an unattractive and likely ineffective method of achieving” the goal
of tort reform. (via Ted Frank)
Like the Catholic who believes in Mary’s “corporeal assumption” based on faith and dogma (with
no empirical evidence), Tabarrok and Helland base their conclusions on assumptions that appear grounded on little more than faith, orthodoxy and wishful thinking. For example, as Walter Olson argues at Point of Law:
I also very much doubt that further empirical investigation will bear out their claim
that contingency fees “do not cause higher awards” or that “contingent-fee limits
are unlikely to reduce lawyers’ income very much, since they will simply switch
to hourly fees”. In fact, I feel confident that most contingency-fee lawyers themselves,
seeing their practice from the inside, would part company from Tabarrok and Helland
on key points in this analysis.
T&H’s primary assumption is the shakiest: They say [at 5]:
“Contingent-fee arrangements are contracts, and along with the vast majority
of economists, we start with the presumption that self-interest pushes private
bargains toward efficiency.” . . .
“In short, our skepticism with respect to the tort system and our defense of
contingent fees rest on the same general presumption in favor of contract.
Restrictions on contingent fees are restrictions on the freedom to contract
and, as such, must clear a high hurdle to be justified. The presumption for c
ontracts can be rebutted. But in examining well-accepted contractual practices,
one ought to start with the premise of efficiency even when neither the theorists
nor, for that matter, market participants themselves can conclusively explain
why the arrangements are efficient.”
This assumption of efficiency has no basis in fact when applied to the contingency fee
arrangement between lawyer and client. In the vast majority of cases, the lawyer presents
the client with a contract that reflects the standard or “prevailing” fee in their locality; the
client has no idea that he or she has the right to negotiate the percentage level, and has
no information that would allow for intelligent bargaining — e.g., the likelihood of success,
how much work is involved, or how much the award is likely to be. (see our post “it’s not
unusual (to charge one-third”)
I don’t know why the cover of Two Cheers depicts the U.S. Supreme Court
building (lack of an art budget? of imagination?). However, I’m glad they reminded me of the
Supreme Court and its opinion in Gisbrecht v. Barnhart, 535 U.S. 789 (2002). Gisbrecht dealt
with the use of contingency fees in Social Security disability cases, where the fees are capped
at 25% of past-due benefits. Justice Ginsberg wrote the majority opinion, joined by seven other
justices, and Justice Scalia dissented. The Court noted:
Characteristically in cases of the kind we confront, attorneys and clients enter into
contingent-fee agreements “specifying that the fee will be 25 percent of any past-due
benefits to which the claimant becomes entitled.” . . (“There is no serious dispute among
the parties that virtually every attorney representing Title II disability claimants includes
in his/her retainer agreement a provision calling for a fee equal to 25% of the past-due
benefits awarded by the courts.”).
Although Justice Scalia dissented, he had this to say about the mode of contracting (emphasis
added):
“The fee agreements in these Social-Security cases are hardly negotiated; they
are akin to adherence contracts. It is uncontested that the specialized Social-Security
bar charges uniform contingent fees (the statutory maximum of 25%), which are
presumably presented to the typically unsophisticated client on a take-it-or-leave-it basis.”
If T&H had bothered to look, they would have found that, in the individual injury cases
that are the focus of their monograph, virtually every p/i contract has a contingency fee that is set at
the maximum allowed in the jurisdiction. The fee is presented to the client as the “standard” fee,
with no opportunity to negotiate for an “efficient” contract. Rejecting fee caps in the holy name
of “contract efficiencies” demands a faith-based brand of deduction and reasoning that should be
anathema to objective economists — and policy-makers.
T&H also use the empirical work of Prof. Herbert M. Kritzer to support
their claim that contingency arrangements do not generate inappropriately high fees
as compared to work done on an hourly basis. Kritzer’s work has been debunked by
assume a 50% chance of a lawyer winning a case and being paid, whereas it seems
quite clear that p/i lawyers seek much more certainty when accepting a case — and
are in fact victorious in perhaps as much as 90% of cases. (see this post, as well as
waiters also leaves this reader scratching his head. The mere fact that tips are paid
after service is rendered, with the amount being at the discretion of the customer,
should be enough to make the authors look for better examples.
There are many other leaps of faith and much faulty reasoning in Two Cheers, but there is one more
major error that seems to demonstrate that T&H do not grasp the basic ethical problem raised by
client advocates like Prof. Brickman and myself against the “standard contingency fee.” T&H say:
“In support of a collusion theory, Brickman and others have observed and inveighed
against the fact that the same contingent fee applies to a big case as to a small one.
The suggestion here is that time and effort do not rise in direct proportion to the “size” of
a case.” [emphasis added]
It is the size of the risk undertaken by the lawyer — the likelihood of winning and the likely amount
of work and expense required for the case — not the size of the case, that is at the core of Prof.
Brickman’s argument (and mine). T&H never address the risk issue — and never explain how or
why the same percentage fee is charged across the board in very dissimilar risk situations.
No matter what happens with tort reform, action should be taken to enforce ethical restrictions on
the use of the standard contingency fee. The Association of Trial Lawyers of America (ATLA) has often
stated that attorneys should “exercise sound judgment in using a percentage in the contingent fee
contract that is commensurate with the risk, cost and effort required.” [Georgia’s Trial Lawyers have repeated this standard here.] That is what is demanded by our ethical rules. But, America’s p/i lawyers have never put this pronouncement into practice. (see Some UnCommonly Good Advice on Contingency Fees)
As I have often said before, each lawyer owes loyalty to one client at a time. Each case taken on
contingency must be evaluated for its own merits and risk — and the fully-informed client allowed to
negotiate and ultimately be charged a fee reasonably related to that risk. When the lawyer charges
a standard fee to virtually every client — and it is the maximum percentage allowed in the jurisdiction — many clients are by definition overcharged. Injured consumers should not be sacrificed on the altar
of the Holy Contract based on purely apocryphal efficiencies.
update (Sept. 23, 2005): See our post trivializing economics (Tabarrok and Helland), a
response to the ABA Journal eReport, “Fee Caps Won’t Solve Liability Crisis, Study Says.”
at my gate
they pay their respects. . .
fireflies
taking up
the holy man’s chant. . .
croaking frogs
riverboat. . .
on a night of fireworks
still selling fireworks
translated by David G. Lanoue
August 26, 2005
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