f/k/a archives . . . real opinions & real haiku

September 4, 2007

contingency fees and the clueless fiduciary

Filed under: viewpoint — David Giacalone @ 5:15 pm

Are personal injury [“p/i”] lawyers virtually in the dark when they enter into contingency fee contracts with their clients — unable to tell which cases are likely to be rather straightforward, resulting in a relatively quick, successful resolution without major expenditure of time or resources, or instead to be complex, and time-consuming with impossible to predict results?  Does such lack of information force them to offer each client a “standard fee” (which is often one-third or 40%, and is usually the maximum permitted in their jurisdiction without court permission) rather than trying to tailor the fee offer roughly to the risk presented by each client’s case, as might be expected under professional ethics and fiduciary principles?

Or, on the other hand, can and do p/i lawyers have sufficient knowledge and experience to make intelligent inquiries, choices and distinctions among clients, so as to greatly reduce the risk of working long and hard on a case without receiving adequate compensation?   That is, are they able to ask questions and make inquiries so as to have a rough idea of the risk status/continuum of each case before they decide whether to accept it and make a fee offer to the prospective client?

I refuse to believe that my p/i lawyer brethren at the bar go around accepting clients in a clueless fashion, with no choice but to charge each client as if taking his or her case presented the highest acceptable risk to the firm’s financial viability, and with no hunch as to whether they have accepted a sure winner, a fair risk, or a true challenge.

My trust in the competence of p/i lawyers is, however, apparently not shared by members of the plaintiff’s personal injury bar. (For a prior example, see this weblogger’s post.) The latest example of Client Selection Insecurity Syndrome comes from Eric Turkewitz, the NYC lawyer who is the proprietor of the New York Personal Injury Blog. In his Aug. 31st Personal Injury Law Roundup #26, Eric reacted to my recent posting “why do lawyers lie (about contingency fees?,” which discusses whether such fees constitute value billing (Aug. 29, 2007).

Moving to legal fees, Perlumtter & Schuelke wrote In Defense of the Contigent Fee as a form of value billing — as opposed to the billable hour with its inherent conflict of interest between client and attorney. David Giacalone at f/k/a didn’t like that, and attacked Perlmutter — OK, not just Perlmutter but attorneys in general who work on contingency — in a post entitled why do lawyers lie (about contingency fees)? Among Giacalone’s complaints, he asserts that “The client rarely is given essential information (such as the likelihood of success, the probable size of a recovery, and the amount of time and money that is likely to be invested by the lawyer) that would allow him or her to place a value on the lawyer’s participation.” There’s probably a good reason for that, being that the information is often unknown at the time the retainer is signed.

. . . . . . . . . . . . . . . . . . . . . . . . . . . ATLA: at least one third bar assoc.

Before you start feeling sorry for the poor p/i lawyer, who would have you believe he (or she) heroically jumps in to take your case regardless of the risk to himself (while charging you the maximum just in case), remember a couple of facts:

  • p/i lawyers reject about two-thirds of all prospective clients, weeding out the losers and the money-pits, and taking only those cases that look potentially capable of bringing in a good pay day; and
  • 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. “Effective Hourly Rates of Contingency-Fee Lawyers: Competing Data and Non-Competitive Fees,” 81 Wash.U.L.Q. 653 (2003), by Lester Brickman, Professor of Law, Benjamin N. Cardozo School of Law of Yeshiva University; and see, e.g., our posts: “Better Data on Contingency Fees Show They’re Too High” (Feb. 23, 2004); “98% Win Rate: Where’s the Risk?” (April 6, 2004); “It’s Not Unusual (to take one-third)” (Sept. 5, 203); “A Bar President Writes About Contingency Fees” (July 16, 2003); and, in general, our Four-part Contingency Fee Essay, which begins here.
  • Most p/i/ lawyers are like Eric Turkewitz, who notes at his website that he is “highly selective in deciding which people to represent” — because “The cases we accept are often complex and time consuming. Most often we are up against multi-billion dollar corporations and insurance companies that will do everything possible to slow the legal process.”

Here’s how Professor Brickman describes the result of the current practice of weeding out the riskiest cases and charging a “standard” rate (your firm’s or your community’s preferred percentage) to virtually every accepted client:

“The use of a uniform pricing structure is a “heads-I-win-tails-you-lose” fee-setting practice. 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.”

As my Dad would say, “that’s a pretty nice racket those p/i lawyers have.” Some members of the public or even our profession might actually admire them for figuring out how to turn the contingency fee concept into such a great little pricing gimmick (and understand their reluctance to change their practices). There’s a big problem, however, with the system as practiced by practically all personal injury attorneys: As members of the Bar, lawyers have a professional ethical duty, and an overlapping fiduciary duty, to charge only fair and “reasonable” fees, and to adequately inform their clients on all important issues. See our essay “contingency fees (part 4 of 4): ethical duties” (April 7, 2006).

Given their proven ability to choose winning cases, and their continuing willingness to spend far more money on advertising than firms that work by the hour or for flat fees (see our post “Contingency Fees Inspire Ever More Lawyer Advertising,” and Ted Frank’s “Search Engine Index” March 27, 2006, and “Search Engine Index II,” Sept. 5, 2007), I simply cannot conclude that p/i lawyers are too clueless to differentiate between broad levels of risk when deciding on the contingent fee arrangement they offer a particular client. (Nor do I believe that they fail to give such an assessment to their partners when new clients are being discussed.) As I said in my critique of Prof. Kritzer’s defense of current contingency fee practices:

No sane observer of the legal scene believes [the myth that p/i lawyers take every case that walks into their doors]. Quite the opposite is true: p/i lawyers sort through cases all the time, rejecting the poor prospects (and advertising that they only take “serious” injuries that could bring huge fee jackpots). That’s why I believe that an experienced p/i lawyer can and does make intelligent guesses about the likely outcome of a case, greatly lowering the overall risk in his or her practice. And, that’s why I’ve often suggested that one possible pricing strategy might be a three-tier percentage system based on the lawyer’s perception of the risk: You give the client a good faith evaluation as to whether the case appears to be low, medium or high risk, and offer corresponding percentages (e.g., 13-23-33%). Of course, you also let the client know that a hourly fee could be negotiated — just like in marital or commercial cases, where the client often has no idea what the final outcome or bill will be.

honest! More important, perhaps: There is no excuse for a lawyer failing to know enough to make this kind of knowledgeable risk assessment and to share it with the client before they negotiate and agree upon a fee. If more time is needed to accumulate more information, the lawyer-fiduciary must take that time, rather than unfairly asking each client to pay the highest level of contingent fee. He or she cannot ethically say, in effect, “Sorry, you must sign a fee contract now, before we know enough to make an intelligent decision on the level of the fee that is fair to you.” (see the description of the Canadian case Usipuik v. Jensen, Mitchell & Co, below the fold of this post) As Prof. Brickman has explained in “The Continuing Assault on the Citadel of Fiduciary Protection” (2003 U.Ill.L.Rev. 1181 [Number 5]), lawyers are the archetypical fiduciary, and:

“The principal fiduciary obligations imposed on the lawyer include the duties of confidentiality, loyalty, safeguarding property, giving disinterested advice, and acting fairly towards the client. The duties to act fairly and in a non-self-interested fashion, in particular, relate to the financial relationship between the lawyer and client and require that a lawyer present the client with information regarding the fee arrangement that approximates what the client would obtain if the client consulted a second lawyer for assistance in negotiating the fee arrangement with the primary lawyer. “

Unfortunately, as ethicalEsq wrote in June 2003 at this weblog, when it comes to lawyers who use contingency fee contracts, there appear to be “Fiduciaries everywhere except in the mirror.” Even worse (and shamefully), lawyers have pushed bar counsel and courts to hold that fiduciary duties do not arise until after a retainer agreement is entered into with a prospective client (see Brickman’s The Continuing Assault, at 1197, which is excerpted below the fold). That’s right: Some lawyers are shameless enough to argue that their duty to put the client’s financial interests above their own (that is, to treat the client fairly) — and to give clients enough information to make intelligent decisions — does not exist until after the level of fees has been settled. [update (Sept. 5, 2007): Beldar disagrees with me. See my comment, too.]
If the Bar wants to make sure clients “get everything you deserve,” we must assure that their lawyers take only the amount that they deserve — an amount, if a contingency fee is utilized, that corresponds with the risk estimated and accepted in good faith by the lawyer at the time the fee contract is entered into. No client should be forced to enter into a contingency fee arrangement without enough information to make an intelligent choice about fee levels and options. Therefore, no lawyer has the right to remain clueless: he or she should not proffer a contingency fee contract and stated fee level until a good faith effort has been made to assess the risk that the law firm is being asked to accept by taking the case.

For a fuller discussion of these issues, see our four-part series:

Also, check out ethicalEsq’s Injured Consumers’ Bill of Rights for Contingency Fees, which sets forth the informational requirements set forth in the American Bar Association’s Formal Ethics Opinion 94-389:Contingent Fees. And see the legal reform group HALT’s Injured Consumer’s Legal Bill of Rights (HALT, The Legal Reformer, December 1997; no longer available at the HALT website).

In addition, below the fold, I’ve excerpted some of the relevant parts of Prof. Brickman’s article “The Continuing Assault on the Citadel of Fiduciary Protection” (2003 U.Ill.L.Rev. 1181 [Number 5]). However, reading the entire article (which gives a history of the fiduciary concept as applied to lawyers and details the attempts of the p/i bar to weaken those duties and fiducial rights of clients) is highly recommended.

campfire…
with each fresh log
the old man’s fish grows longer

crescent moon
the ex-con’s
friendly smile

……………………………………………. by ed markowski

afterthought (Sept. 10, 2007): Here’s an excerpt from a prior post on fees and fiduciary duties that is well-worth repeating:

[I]n 1996, the ABA Task Force on Lawyer Business Ethics, issued its Statements of Principles in Billing for Legal Services (excerpted in Business Lawyer, 51 Bus. Law 1303, Aug. 1996), which included these notable introductory remarks:

[T]he Statement of Principles in Billing for Legal Services and the Statement of Principles in Billing For Disbursements and Other Charges are predicated upon an understanding between lawyer and client. To be valid, such an understanding requires, at the least, a fully informed client, whose information usually comes from the lawyer seeking agreement. The form, nature, and extent of the disclosure will depend on the sophistication and knowledge of the client as to legal matters and business dealings with lawyers. Thus, what might constitute acceptable disclosure to an in-house counsel accustomed to negotiating with lawyers over engagement letters and fee arrangements might be unacceptable when dealing with a business executive very knowledgeable about technical aspects of the business, but relatively inexperienced in dealing with lawyers over fee arrangements, the custom in the community with respect thereto, or the availability of alternative fee arrangements.

The courts and lawyer-disciplinary bodies normally do not require separate representation of the client with respect to the billing aspect of the engagement, even if the client is woefully naive. They often look, however, at the fairness of the understanding with skepticism, insisting that the lawyers carry the burden of establishing fairness.

In setting fees, then, the lawyer-fiduciary must act in a manner that puts the client’s interest first — to ensure a result that is fair to both lawyer and client. Making sure the client is fully informed when entering into the fee arrangement is essential, taking into account the sophistication level and experience of the particular client.

  • Asking what fee might result, if the client had engaged another lawyer solely to negotiate fees, seems to me to be a very useful standard. update: Don’t laugh. Canadian tort lawyers Polten & Hodder have this advice on their contingency fee FAQ page:“Negotiate with your lawyer. It may well be advisable to pay a separate, independent lawyer to negotiate the contingency agreement with the lawyer who is taking your case. Don’t laugh. If a small up front fee saves you $100,000 in fees down the road, it is money well spent.” (for more in this spirit, see our prior post a Canadian role model, Jan. 5, 2005.)
  • _______________________________________________

    If you’re interested in learning more about the lawyer’s fiducuary duties (and therefore the client’s fiducial rights) when entering into a contingency fee arrangement, here are some of the relevant portions of “The Continuing Assault on the Citadel of Fiduciary Protection” (by Lester Brickman, Cardozo School of Law, 2003 U.Ill.L.Rev. 1181 [Number 5]). Most footnotes have been omitted:

    at 1182]

    Our common-law heritage includes development of the three main branches of our civil law: contracts, torts, and fiduciary obligation. Under the latter, one designated as a fiduciary is obligated to exercise the utmost good faith and refrain from self-interested actions in dealing with clients, patients, beneficiaries, shareholders, and others designated as entitled to the protections of fiduciary status. The attorney-client relationship is the archetype for the fiduciary obligation, and its roots can be traced back for centuries, to the earliest period of development of our legal heritage.

    Fairness is to be determined according to a heightened fiduciary standard rather than the arms-length marketplace standard. This standard, in turn, is commonly expressed as a requirement that fees must be “reasonable.”

    In recent decades, the fiducial1 rights of clients have been under assault. Lawyers’ self-interest is increasingly overpowering their selfrestraint. Fiducial rights of clients carefully constructed over the course of a millennium are being eroded. Among the protective structures that are being undermined are the rights of clients to hold lawyers account [1183] tections for contingency fee clients, and the increasing irrelevance of the “reasonable fee” requirement.

    at 1183]

    In particular, the obligations to charge a tort claimant fair and reasonable fees and to fully inform that client of fee options and how they comport with the client’s interest—the very core of the traditional fiduciary obligation and its ban on overreaching—has been eroded by decades of attorney practices in the marketplace which have effectively received the imprimatur of the judiciary and by lax or nonexistent disciplinary oversight of contingency fees.

    1191]

    Lawyers are the quintessential fiduciary.41 Over the course of centuries, and from many different strands of law, they have had devolved upon them “[t]he duty to deal fairly, honestly and with undivided loyalty [that] superimposes onto the attorney-client relationship a set of special and unique duties, including maintaining confidentiality, avoiding conflicts of interests, operating competently, safeguarding client property and honoring the client’s interests over the lawyer’s.”42

    The origin of specific fiduciary obligations of the lawyer may be traced back to the Statute of Westminster I, which defined and prohibited certain forms of lawyer misconduct.43 . . .

    1197 – 1198]

    Nowhere is the corrosion of fiduciary fee protection in recent years more apparent than in the area of contingency fees. As first formally approved by the bar in 1908, the Canons of Ethics provided that contingency fees “should be under the supervision of the court, in order that clients may be protected from unjust charges.”68 While courts responded to this frank acknowledgment of the of likelihood self-interested behavior by invalidating the use of standard contingency fees where lawyers did not assume any meaningful risk,69 in recent decades courts have become more hospitable to lawyers’ financial interests. A major step in that direction was the development of the doctrine that fee contracts entered into prior to or contemporaneously with the commencement of the attorney-client relationship are exempt from the requirement of special [1198] judicial scrutiny.70 Under that doctrine, a lawyer has an incentive to have the client sign a retainer agreement before delving deeply into the facts so that in the event the lawyer learns immediately thereafter that there is no realistic contingency involved and that, instead, there is a high likelihood of a substantial settlement offer being proffered before any substantial services will be required, that information will pose no burden to the lawyers’ charging a standard contingency fee.71 Doing so thus insulates the lawyer from the fiduciary obligation to fully disclose that information to the client before entering into a fee arrangement since before the relationship commences, he has no such information to disclose.

    70. See Lester Brickman, Contingent Fees Without Contingencies: Hamlet Without the Prince of Denmark?, 37 UCLA L. REV. 29, 55 n.95 (1989) [hereinafter Brickman, Contingent Fees] at 76–84.

    71. A Canadian court invalidated a twenty-five-percent contingent fee contract entered into by a passenger rendered a quadriplegic in an auto accident, when there was a policy limits settlement of $524,900 after very little effort by the attorney. See Usipuik v. Jensen, Mitchell & Co., [1986] B.C.L.R.2d 283 (Can.). The court stated:

    “When the [retainer] contract was made, Mr. Fischer [the lawyer] did not know what the position of the insurer was on liability. It does not seem right to me that a lawyer should permit a would-be client to enter into this sort of contract when neither he nor the client has any idea what position the Insurance Corporation . . . is going to take on liability. If the practice were adopted of postponing the contract until an enquiry was made of the Insurance Corporation . . . as to its position on liability and if the Insurance Corporation . . . were to reply promptly and sensibly to such an enquiry, a proper assessment of risk on liability could be made. The contact could then be founded on the risks so disclosed. I do not see how it can be fair for a contract such as this to be made when both parties to it are in a state of unnecessary ignorance.”

    As contingency fee representation has consequently become more lucrative—often generating effective hourly rates of thousands of dollars72— and the use of contingency fees has become more widespread,73 financial self-interest has become increasingly at odds with both fiduciary standards and the self-proclaimed responsibility of the bar to selfregulate in the public interest.74

    1213]

    The hallmark of the gross overcharging that permeates contingency fee practice is the zero based accounting system that plaintiff lawyers use. 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 multimillion dollar settlement is a virtual absolute certainty as, for example, when a doctor amputates the wrong limb, 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. The standard fee 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.139

    139. In commenting on a contingency fee in an age discrimination case which a federal appellate court had described as “speculative in nature,” the Tax Court stated: “Despite characterizing petitioner’s right to recovery as speculative, his cause of action had value in the very beginning; otherwise, it is unlikely that . . . [the law firm] would have agreed to represent petitioner on a contingent basis. . . . [The] attorney . . . assisted in realizing the value already inherent in the cause of action.” Kenseth v. Commissioner, 114 T.C. 399, 413 (2000); see also Brickman, Contingent Fees, supra note 69, at 32–33. For a discussion of an alternative to such ethically challenged zero-based accounting, see id. at 94–99;. see also STEPHEN GILLERS, REGULATION OF LAWYERS: PROBLEMS OF LAW AND ETHICS 139–51 (4th ed. 1995):

    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?

    1216]

    Ethics 2000 started out to endorse client rights, but ended up joining the assault on the citadel of fiduciary protection. Financial self-interest has once again triumphed over fidelity to fiduciary principles.148

    white lie
    the mirror doubles
    the white chrysanthemum

    ……………………………………………… Roberta Beary, Esq. – bottle rockets #12; fish in love

    5 Comments

    1. I can’t wrestle myself to the ground as your advocate against me in our fee discussions…

      David Giacalone is a lawyer who hates contingency fees. Although he and I have never met, David and I have bumped into each other a few times in the blogosphere, most recently through a long-running but very civil discussion in the comments section his…

      Comment by BeldarBlog — September 5, 2007 @ 1:07 am

    2. Why not have a floating contingency fee that is adjusted monthly or even daily as the prospects for each case rise and fall with each new development or discovery during the representation? (This would really fine tune the risk factor.) Or, allow the initial contingency fee to float on the basis of the ecomonics of each law firm as the lawyers resolve the other cases being handled at the same time? Clients could receive daily updates on the contingency fee percentage – it would be like following the bond market.

      [Editor’s Note: Hey, GTL, why not make a serious suggestion and act like you really care about and and are finally willing to give serious thought to the ethics of contingency fees? When you take on a client you assume a lot of responsibility for the case, so the appropriate time to set a contingency fee is at the time you agree to handle the case. Of course, the responsible lawyer who is surprised when a case settles much or quickly than expected has the right to accept a much smaller fee out of fairness to the client. ]

      Comment by Greedy Trial Lawyer — September 5, 2007 @ 7:05 am

    3. The best measure of “reasonableness” is “willingness to pay.” The market among PI lawyers is robustly competitive. The market rate seems to be about 1/3 to 40% of recovery, though some lawyers have competed by advertising lower contingent fee rates.

      Most of the time when you sign a client you are pretty sure about liability, but damages are an open question, as the full extent of injury is only rarely apparent when you sign a client. It probably is correct that around 90% of signed contracts end up producing SOME kind of recovery, but some of them turn out to be trivial, and viewed from a time-is-money perspective the lawyer has lost money on the case. Also, money the lawyer advances on a case, such as court costs or experts or court reporters for transcripts, could run in the thousands, and are not recouped by the lawyer until the end of the case (and interest is not charged on these items, at least in my state).

      Any time a lawyer represents a client for money there is the potential for “conflict,” whether by contingent, hourly, or flat fee. Contingent fees have long been recognized in this country. Often, you see defense firms charge a mirror-image version of this to their own clients, in the form of a “success fee” calculated on the amounts of money saved for their clients.

      Comment by Mr. B — September 9, 2007 @ 5:11 pm

    4. Mr. B, I cannot agree with your facts, economics or ethics. “Willingness to pay” is only likely to measure “reasonableness” when the buyer of services is adequately informed and there is adequate price competition. Where the prospective client has no way to know how likely he is to win the case, how much work the lawyer is likely to do, and how large the fee could be, it is unreasonable to say he or she willingly enters the fee agreement. That is especially true when the client is not given any indication that the fee might be negotiable and is merely offered what is usually the maximum permitted in the jurisdiction. Of course, the situation is made worse by the campaign over a number of decades by the tort bar to create the impression that the local standard rate was a given, perhaps even required by law.

      Of course, there is some risk always for a lawyer in a contingency case, but without that risk, you could not ethically charge more than a reasonable hourly fee. [And, note that most Main Street lawyers charging hourly fees work with the risk, every day, of not being fully paid.] However, without in some way setting a fee percentage that jibes with the lawyer’s good faith perception of risk, you are very likely to overcharge many clients.

      Yes, there is rabid competition to secure clients by p/i lawyers, but there is no indication in the real world of any meaningful price competition of any sort. Indeed, there is so much competition to attain the clients precisely because that lack of fee competition makes the potential pay-off so big for the law firm.

      It is obvious that every kind of fee arrangement has a potential for conflict with the client’s interest. But, unlike any other kind of fee mechanism, using a standard contingency fee — one unrelated to the risk presented by the particular client — has a built-in certainty of overcharging, automatically, a very large percentage of clients.

      You seem to be arguing that a fee is reasonable so long as the client agrees to it, no matter how little risk you are taking and how little work you are likely to do, or actually do on the case. That position is, at best, ethically-challenged. It doesn’t matter what defense counsel may or may not do (except to note that they are far more likely to be dealing with sophisticated clients who have the information and leverage they need to bargain for a fair fee). What matters is how fairly and ethically each p/i lawyer treats each particular prospective client when setting a contingency fee. By abusing an otherwise fine concept by turning into a “racket”, p/i lawyers are the enemies of the contingency fee, not I.

      Note: I have added an “afterthought” to the body of this post that repeats an important excerpt from a prior post on fees and fiducuary duties and the need to have a fully-informed client.

      Comment by David Giacalone — September 9, 2007 @ 8:22 pm

    5. […] to mail around, it’s a great example of a motley weblog community in action: you can read an analysis of contingency fees, a defense of Britney Spears, admissions talking about their favorite moments from admissions phone […]

      Comment by Mike Caulfield » Blog Archive » The answer to the legal objections — September 12, 2007 @ 9:41 am

    RSS feed for comments on this post.

    Sorry, the comment form is closed at this time.

    Powered by WordPress