f/k/a . . . the archives

August 29, 2007

why do lawyers lie (about contingency fees)?

Filed under: Haiku or Senryu,lawyer news or ethics,viewpoint — David Giacalone @ 12:22 am

The two-person Austin, Texas, law firm Perlmutter & Schuelke, LLC offers a free copy of partner Mark L. Perlmutter‘s 1998 book “Why Lawyers (and the rest of us) Lie and Engage in Other Repugnant Behavior,” at its civtrial.com website. Here’s what the publisher and P&S say about the book:

Why Lawyers (and the rest of us) Lie & Engage in Other Repugnant Behavior, takes on our bashing, adversarial culture, epitomized by the Americal Civil Justice system. As readers explore its unremitting hostility and deception, they learn that the legal system itself is merely an exemplar of a profound defect in our national character — a lack of courage to confront the dark side that exists in all of us. Unchecked, this dark side runs amok, embroiling us in shrill, unproductive conflict, which in turn creates a spiral of alienation and distrust. But Why Lawyers Lie does not just identify the problem; with humor and insight it unearths the underlying causes and provides solutions. It is a book for anyone weary of unproductive conflict, be they litigants, lawyers, professionals, or observers and participants in politics and business.

At Amazon.com (where you could pay over $12 for a used copy of the book), the Publisher describes author Perlmutter as “a leading authority on ethics and professionalism. His philosophies have been embraced by the Texas Bar Association and numerous professional groups interested in learning how to solve disputes honestly and ethically.” The P&S firm site says “Mark trains other lawyers and law students in persuasion, trial tactics, and professional ethics.” He’s also an adjunct professor at U. Texas law school.

After reading the above information about lawyer Perlmutter and his war against deception, hostility and “unproductive conflict,” I must admit that I’m surprised by the content of the first post I’ve ever read at the P&S weblog: “In Defense of the Contingent Fee” (Aug. 20, 2007). I found the posting yesterday, when D. Todd Smith, who is hosting Blawg Review #123 at the Texas Appellate Law Blog this week, pointed to it, saying that the “Blog ruminates on contingent fees as a form of value billing.” Of course, the ethics of contingency fees and value billing are often on my mind, as evidenced by the content of this weblog.

Below the fold (click “More“), you’ll find one version of a disclaimer I often must use when talking about the ethics and economics of contingency fees. It’s meant to anticipate the usual reaction of p/i lawyers, who dismiss all criticism of contingency fee practices as the spawn of evil, anti-consumer, pro-business, tort reformists. For the record: I am a client’s rights and competition advocate, and neither a tort reformer nor insurance industry puppet.

My beef is not with the concept of the contingency fee (“no fee unless we win”), which has many useful purposes and is not inherently unfair to the client, but with the use of a “standard” contingency fee percentage by a law firm or within a community for virtually all clients, with no connection between the fee level and the actual risk in a particular case that the lawyer will work without adequate compensation. Furthermore, my focus is on the average, unsophisticated, “everyday” personal injury client, not on complex class actions, novel product liability cases, or commercial lawsuits taken on a contingency basis.

I don’t know whether it was Mark Perlmutter or his partner Brooks Schuelke who penned “In Defense of the Contingent Fee,” or if they write the weblog pieces jointly. I do know that “In Defense of the Contingent Fee,” is typical of the highly defensive, self-serving, and misleading propaganda spread by the plaintiff’s personal injury bar (who variously call themselves “trial,” or “justice,” or “consumer” lawyers), whenever a question is raised about the ethics or wisdom of contingency fees.

P&S make two major erroneous points in their posting:

  1. they equate contingency fees with the currently fashionable concept of “value billing;” and
  2. they insist that the personal-injury plaintiff has the bargaining power needed to avoid unfairly high fees.

Contingency Fees & Value Billing: Perlmutter & Schuelke explain that “a new wave of attorneys are practicing value billing; setting a fee arrangement up front that is not based on the time spent on a project, but on the value that the attorney brings to the client.” (emphasis added) They quote Enrico Schaefer of The Greatest American Lawyer weblog, saying “The best part about value billing is that it requires the lawyer to think strategically, offensively and proactively every single day.” P&S then assert:

“But value billing isn’t new. Personal injury lawyers (and many other plaintiff’s lawyers) have been value billing for years through the use of contingent fee agreements. . . . And the contingent fee has all the strategic benefits mentioned by Mr. Schaefer; the personal injury lawyer has an incentive to think through the case and push it to resolution as efficiently as possible.”

There are a number of problems with equating contingency fees with value billing. Briefly, they include:

  • Very few clients play any role in setting the contingency fee, making it incongruous to say that the fee reflects the client’s valuation. There is no discussion or negotiation. 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. The contingency fee percentage is merely the lawyer’s valuation of his or her efforts — the price to hire the firm’s services. And, it is presented to most clients on a take-it-or-leave-it basis.
  • tiny check More important, the application of a “standard” percentage fee to the entire amount won by the client– usually 33.3% or 40% — cannot possibly measure with any precision “the value that the attorney brings to the client” — especially when the same fee level is used by almost all lawyers in town, regardless of their skill and experience, and applied to almost all clients, no matter how risky or risk-free the particular case. But, the client with a meritorious case walks into the door of a law firm with a cause of action that already has significant worth/value (like bringing an uncut diamond to a jeweler) — and, the typical contingency fee collected by a lawyer applies the stated percentage of winnings whether the lawyer has achieved, diminished or increased the value of the client’s “gem.”
    • Although a contingency fee that is “stepped” to reflect the stage in the proceedings when a resolution is reached (e.g., 25 – 33 – 40 – 50%) has the potential to better reflect value received by the client, doing so requires knowing whether the net return to the client actually increased by going forward rather than settling earlier, whether the end result was more than the initial estimated worth of the case, and whether a more skilled lawyer could have achieved a similar result at an earlier stage.
  • Furthermore, there is no particular reason to assume that working on a contingency basis achieves “efficiency benefits” for the client (even if we assume that typical value billing does have such benefits). P&S claim that “the personal injury lawyer has an incentive to think through the case and push it to resolution as efficiently as possible.” What is “efficient” for the lawyer — bringing the case to a resolution that produces an adequate fee as quickly as possible and with a minimum effort — may have little or no relationship with achieving the maximum net return for the client. When a law firm has a constant stream of cases that keeps each lawyer fully occupied, the incentives under a contingency fee agreement tend toward pushing to have each case “cashed out” as soon as possible, without worrying about marginal return on efforts that might increase the client’s take.

winter thaw
the little white lies
that won’t fade away

………………………………….. ed markowski

white lie
the mirror doubles
the white chrysanthemum

………………………………..……… Roberta Beary
“white lie” – bottle rockets #12; fish in love: HSA Anthology 2007

SoapBox The Client’s bargaining power vs. p/i lawyers. After condemning Tort Reformers for attacking contingency fees while purportedly embracing value billing, Perlmutter & Schuekle get a little shrill and disingenuous:

“And the arguments against the contingent fee are ridiculous. The major criticism is that plaintiffs do not have any bargaining power and thus, unfair fee agreements might lead to a windfall for plaintiffs’ attorneys. . . . the premise that the plaintiff doesn’t have any bargaining power is simply false.”

What is the basis for the bargaining power claim?

“For example, if you do a Google search for “Austin personal injury lawyer” you receive 2,150,000 results. While there are obviously not that many personal injury lawyers in Austin, the point is clear that the potential plaintiff has the ability to shop around.” (emphasis added)

Now, I understand. After decades convincing the public that a “standard contingency fee” exists (and might even be required by law), while adopting a de facto Advertising Rule of Omerta over Fee Levels, and presenting virtually every client that walks in the door with a fee agreement that already has that standard percentage filled in, without stating a willingness to negotiate that fee, Perlmutter and Schuelke want us to believe that the unsophisticated injured party can readily threaten to “shop around” for a lower rate and thereby avoid being stuck with an unreasonably high fee. In effect, we’re supposed to believe that every year tens of thousands of p/i clients who have bargaining leverage never use it — instead, they choose to passively and unnecessarily hand over a large chunk of their damages to their lawyer. [see our essay do “standard” fees still exist? (April 5, 2006)]

Of course, that isn’t how the real world of p/i lawyers and clients works — despite the existence of thousands of p/i lawyers rabidly seeking injured clients. Ask any adult member of the general public what the contingency fee is in their community [they will readily give you a number] and whether they are allowed to negotiate for a lower percentage [they will be confused or bemused by the question]. Or, as we suggested in an essay last year that describes and explains the market failure and lack of price competition in personal injury cases [contingency fees (part 1 of 4): market failure (April 2, 2006)]:

Pick up your local Yellow Pages. Check out all of the many full-page and block ads by p/i lawyers. Can you find even one that mentions an actual fee level, much less a willingness (a) to charge less than the local customary percentage or (b) to negotiate the fee? If you do, please let me know. [Note: It's been 16 months, and no one has sent us an example.]

Similarly, former Harvard Law School Dean Derek Bok also described the strange market failure in the p/i litigation field in his landmark 1993 book The Cost of Talent (1993), at 139 to 140. His analysis begins:

“The world of plaintiffs’ litigation would seem competitive enough to satisfy the most zealous free market economists. [with yellow pages and billboards filled with smiling lawyers willing to take your p/i case] . . . Curiously, however, the crowded market for legal services turns out to work quite differently from anything described in an economics textbook. . . .

ooh “There is little bargaining over the terms of the contingent fee. Most plaintiffs do not know whether they have a strong case, and rare is the lawyer who will inform them (and agree to a lower percentage of the take) when they happen to have an extremely high probability of winning. In most instances, therefore, the contingent fee is a standard rate that seldom varies with the size of the likely settlement or the odds of prevailing in court.”

“. . . Instead of perfect competition, then, the world of plaintiffs’ litigation is a much more haphazard place where ignorance and luck play prominent roles in shaping the fortunes of attorneys.”

The best P&S can do is to argue that “for the exceptional case . . . personal injury lawyers are often willing to negotiate the fee.” Well, if true, “often for the exceptional case” simply won’t suffice for meeting the ethical duty of each p/i lawyer to each client.

As I wrote last year [in contingency fees (part 4 of 4): ethical duties (April 7, 2006)], after fully exploring the ethical and fiduciary duties of lawyers entering into contingency agreements:

The lawyer must (1) fully inform the client of all relevant factors, so that agreements can be entered into knowingly and intelligently; and (2) treat each case and client separately, when deciding on the appropriateness of the arrangement and the reasonableness of the agreed-upon fee.

tiny check The ethical expectation is that the lawyer will make a good faith, professionally-informed estimate of his or her anticipated effort and risk (of non–recovery or inadequate compensation), and explain that evaluation to the client, prior to their coming to an agreement on a contingency fee. The lawyer will offer the client a reasonable fee (one reasonably related to the perceived risk), rather than automatically requesting the maximum percentage permitted in their jurisdiction, and hoping the client will passively accept it. Only when the client is brought into the discussion, fully informed of the lawyer’s good-faith evaluation of the case, and told of the right to negotiate, can we begin to rely on the reasonableness of the resulting contingency fee.

Why do lawyers lie about contingency fees? Frankly, they’ve put on ethical blinders, and live in deep denial about the fairness of using standard contingency fees, because their little racket is just too good to jeopardize by treating each client and case individually and fairly. If you want to know the facts about a lawyer’s duties relating to contingency fees, and the client’s rights when entering into such agreements, we suggest you read:

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

family photo
my very best
or else smile

crescent moon
the ex-con’s
friendly smile

“thirty-five.”
the caricature artist lengthens his nose

lunar eclipse umpireS
i fall for
the hidden ball trick

……………………………………………. ed markowski
“campfire” – Modern Haiku (Autumn 2006); “lunar eclipse” tinywords (Aug. 29, 2007)

No Lie: Many thanks and much appreciation goes out to friend and haijin Ed “Prolificus Maximus” Markowski, for coming out of haikai retirement today to pen a passel of pithy poems on falsehood and deception, in a matter of a couple of hours.

__________________________________

Here’s an apologia that appeared first in contingency fees (part 4 of 4): ethical duties (April 7, 2006), in which I explain where I am coming from when analyzing contingency fee issues:

As ethicalEsq said in July 2003, tort reform is a matter of political and social policy, not legal ethics, and it is not my fight. My perspective — by temperament, and after a dozen years practicing antitrust law at the FTC — is that of a consumer and competition advocate. I want legal clients to receive the benefits of both professional responsibility rules (with related fiducial rights) and competition, and I believe that a well-informed client can protect his or her interests far better than one treated like a mushroom (viz., kept in the dark and covered with manure)

Personal injury lawyers, however, seem to get just as upset with me as they do with tort reformers, even though I have never advocated limiting the right to sue (except when a claim is truly frivolous — that is, without a colorable basis in fact or law), nor capping the amount paid out in damages. However, because I want clients to get all that they deserve, that means having their lawyers take only the fees that they deserve. That’s what has gotten me in hot water with the personal injury bar from the very first time I questioned whether application of a “standard” or customary contingency fee to virtually every client is ethical. That was before I had ever heard of a tort reform movement.

5 Comments

  1. Thanks for mentioning my Blawg Review post. I have one small request: Would you mind correcting my name? (It’s Smith, not Moore.)

    [Editor's Note: Todd, I apologize for the "misnomer." I have no idea how "Moore" found it's way into your name and, of course, I have just fixed my mistake. My brain often does not know what my fingers are doing on this keyboard.]

    Comment by D. Todd Smith — August 29, 2007 @ 8:40 am

  2. [...] Antitrust Review Chicago IP Litigation Blog Build a Solo Practice, LLC California Blog of Appeal f/k/a idealawg Infamy or Praise Law.com Legal Blog Watch Lawgarithms Likelihood of Confusion New York [...]

    Comment by Welcome, and Thank You : Texas Appellate Law Blog — September 1, 2007 @ 4:52 pm

  3. I suppose many lawyers find the ability to hide behind the complexity of their trade beneficial for business, hiding, their costs in relation to their competitors.

    It is puzzling why they can often mislead as to their costs as today’s consumer is more than prepared to pay for a service that is beneficial to them. If they run an honest law establishment why need to hide anything?

    Comment by Alfred Finkle — February 12, 2008 @ 1:56 pm

  4. I am a former client of the Perlmutter law practice. I hired them to sue a large Chicago bank, now Chase, for wantonly and unlawfully destroying my credit rating by denying a chargeback and insisting I should pay. (now, of course, one cannot do that because the banks and credit card companies, in consort with their lawyers, deny us our constitutional right to legal redress and force us to agree to arbitration, which is usually a rigged proposition).
    My lawyer, Brad Reagan, was in partnership at the time with Perlmutter. Schuelke was also counsel. Reagan performed brilliantly and had the bank’s pathetically arrogant and effete lawyer on his knees begging for settlement before the first day of trial ended.
    Reagan cajoled me to settle for far less than I could have gotten and then wrote up a settlement agreement whose terms included that I could never discuss the settlement or its existence with anyone; likewise for the bank. And the alleged debt was deleted forever, according to the agreement. When I asked Reagan what would happen if the bank violated the agreement, as I had a hunch they would, he stated unequivocally that he would be overjoyed to sue them again on my behalf. At least 3 times since that settlement, the bank has violated the agreement and sent collection agents after me for disguised and egregiously bloated amounts. When it happened the first time, I contacted Brad Reagan and reminded him of his agreement to sue. He would not. He went back on his word. Brad Reagan, and, by partnership, Perlmutter, lied to me and maybe more. Because Perlmutter & Reagan & Schuelke mysteriously did not utilize their foresight to install a penalty clause in the settlement, no other lawyer would touch the case.
    The first edition of the Liar book was out at that time. I regarded it then as a hypocritical, cheap publicity stunt and do so now more than ever. Perlmutter & Co. lied to me (and the lie was more than semantics) and I suspect they have lied about fees and other stuff to many other clients, adversaries, juries, etc.
    The Liar book is, in Texan parlance, BULLSHIT!
    Caveat emptor.

    Comment by Gus McCrae — August 29, 2008 @ 2:06 am

  5. r_______ h__________ of t_______ texas also lies to her clients

    [Editor's Note: Sorry, Betty, but I blanked out the name of the lawyer you mentioned, because I can't allow particular lawyers to be attacked in situations where I do not know and cannot verify the facts.]

    Comment by betty johnson — October 2, 2008 @ 9:44 pm

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