Recently the ABA Journal e-Report ran a story on contingent fees, inspired by a study concluding that “imposing caps on contingent fees is probably an ineffective way to achieve [tort] reform.”
Contingent fees are significant in employment litigation as well as traditional tort litigation. Though federal employment statutes provide for specific fee awards, my understanding is that many plaintiffs’ employment attorneys nevertheless work on a contingent fee basis. Even if they do not, the effect is similar in that their recovery of fees is dependent upon their success.
The article contains some back-and-forth between experts regarding this study’s conclusions.
The study correctly notes the role of contingent fees in “improv[ing] access to courts for low-income plaintiffs.”
Yet while I agree with this observation, and with the authors’ reluctance to interfere with freedom of contract by setting arbitrary limits to such fees, I am troubled by the potential for deep conflicts of interest between contingent fee lawyers and their clients over settlement proposals.
Lawyer and client will often have very different risk tolerance, and it is not unusual for settlement proposals that would otherwise appeal to plaintiffs to be unappealing to their lawyers once they have invested much time in a case.
On the flip side, if the lawyer has invested relatively little time, the result of a contingent fee may be extremely high compensation of the lawyer, calculated on an hourly basis.
A solution more flexible then some sort of one-size-fits-all contingent fee caps already may exist in the form of the ethical rules governing legal fees.
Rule 1.5 of the ABA Model Rules of Professional Responsibility provides:
(a) A lawyer shall not make an agreement for, charge, or collect an unreasonable fee . . . The factors to be considered in determining the reasonableness of a fee include the following: (1) the time and labor required, the novelty and difficulty of the questions involved, and the skill requisite to perform the legal service properly; (2) the likelihood, if apparent to the client, that the acceptance of the particular employment will preclude other employment by the lawyer; (3) the fee customarily charged in the locality for similar legal services; (4) the amount involved and the results obtained; (5) the time limitations imposed by the client or by the circumstances; (6) the nature and length of the professional relationship with the client; (7) the experience, reputation, and ability of the lawyer or lawyers performing the services; and (8) whether the fee is fixed or contingent.
Subsection (c) then further addresses contingent fees:
A fee may be contingent on the outcome of the matter for which the service is rendered, except in a matter in which a contingent fee is prohibited . . . . A contingent fee agreement shall be in a writing signed by the client and shall state the method by which the fee is to be determined . . . . The agreement must clearly notify the client of any expenses for which the client will be liable whether or not the client is the prevailing party. Upon conclusion of a contingent fee matter, the lawyer shall provide the client with a written statement stating the outcome of the matter and, if there is a recovery, showing the remittance to the client and the method of its determination.
What is the relationship between subsection (a) and subsection (c)? Can the circumstances (the subsection (a) factors) ever be such that an agreed contingent fee is not a reasonable fee? I would submit that they may — and often are. If (c) was intented to be entirely separate, it would have been expressly excepted from (a); instead, the contingency is mentioned as only one factor in determining reasonableness.
Someone needs to start challenging contingent fees in extreme cases: those in which lawyers have expended very little time and effort, yet obtained large settlements — mainly because of the inherent value of the case — and thus received huge fees when calculated on an hourly basis.
E.g., wrongful death case settles for $1M with a 40% contingent fee after 10 hours of work; lawyer “earns”$2M$400,000 or $40,000 an hour.
Is this a reasonable fee under the above standards? Is the Pope Catholic?
“Fee Caps Won’t Solve Liability Crisis, Study Says,” by G.M. Filisko (reporting on Alexander Tabarrok and Eric Helland, “Two Cheers for Contingent Fees.”)
Similar issues arise on the defense side whenever there is insurance coverage. We often find ourselves taking orders from the insurance carrier rather than the client. Very bad stuff.
ReplyDelete“E.g., wrongful death case settles for $1M with a 40% contingent fee after 10 hours of work; lawyer “earns” $2M or $40,000 an hour.”
Actually I think the fee would be around $400K sted $2M. Typo aside though, even this extreme an example may be open to interpretation. Did it only take 10 hours b/c its the biggest, scarriest Plaintiff’s lawyer in town? etc.
I stand corrected on the math.
ReplyDeleteWhether on plaintiff or defense side, we as lawyers have serious ethical obligations to advise our clients as to what we honestly believe to be the best course of action for THEM, regardless of the interests of insurance companies or our own self interest, including hourly defense lawyers’ interest in future hourly fees if a case is not settled.
I do not want to be read as picking on plaintiffs’ lawyers and assuming they are necessarily unwilling or unable to fulfill this obligation; just to point out the incentives tugging them away from it.