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April 8, 2006

contingency fees (pt. 2): risk matters

Filed under: — David Giacalone @ 2:19 pm

This is Part II of a four-part series on the use of Contingency Fees (also called “contingent fees”) in personal injury (“p/i”) cases.  When properly used, contingency fees can be a beneficial option for the client.  However, this series focuses on the ethical and competitive issues raised by the common practice of using a “standard” contingency fee (often one-third or 40% of moneys received) for virtually all clients — without regard to the risk the lawyer is taking in each particular case of doing the work without receiving adequate compensation.  The standard contingency fee results in many clients paying unfairly high fees that are not warranted by either the work performed or the risk taken by the lawyer.

- Click for Part I (Market failures); Part II (risk matters)Part III (do “standard” fees still exist?); and Part IV (ethical duties) -

 

 

SlicingThePie

Many members of the personal injury bar argue that you have to be a tort-reformin’, insurer-lovin’, consumer-hatin,’ ethics whore — or a dupe of the above — to assert that contingency fees should relate to the risk being taken by the lawyer in a particular case. I don’t know if the tort lawyers really believe their own propaganda, but they consistently make those charges, while at the same time constantly reminding the world that they “earn” their above-hourly-fee premium precisely because they are taking the risk of working hard, and fronting litigation expenses, without being compensated adequately, or at all.

tiny check The main components of the risk are, of course, how likely the client is to succeed with the claim, how much is likely to be awarded and collected, and how much work and resources the law firm is likely to put into the case. The risk is lower, and the fee should therefore be lower, when the case is likely to be a winner with a big, collectible jackpot, and when relatively fewer hours and dollars will be expended to win.

strike it rich

When legal ethics experts espouse the link between the reasonableness of a contingency fee and the perceived risk at the time the fee arrangement is being entered, they are called captives of evil forces or simply insensitive simpletons who will destroy the American justice system and deprive the injured Little Guy of competent legal counsel (see, for example, this Jan. 2004 article from the Miami Herald, and this press release by Public Citizen, for sample p/i rhetoric). The p/i bar points to the ubiquitous use of what appears to be — but they no longer acknowledge to be — a standard percentage rate in most jurisdictions, and the lack of disciplinary action against such fees. That is supposed to settle the debate.

mushroomsG Well, before I give up, I thought I would point out again just who — besides people like Lester Brickman, Derek Bok, Howard Phillips, and myself, plus lots of state and federal judges is on record saying that risk is central in evaluating the reasonableness of a contingency fee. In case you have a short attention span or are in a hurry, I’ll start with my Big Gun: The American Trial Lawyers Association. As we wrote yesterday, ATLA made the following statement to the Utah Supreme Court (at 12) regarding the Common Good Early Settlement Fee Proposal, in 2003:

“Contingent fee rates may appear uniform from the vantage point of an academic observer who makes little further inquiry. Indeed, it is convenient to refer to one-third as the usual rate when explaining how contingency fees work, as indicated by the phrase the Petition takes from the Association of Trial Lawyers of America (ATLA) publication, “Keys to the Courthouse.?” Petition at 5. Potential clients, and anyone else who reads beyond the first sentence of the ATLA document, will find a more detailed description:

priceReducedN

“The percentage charged in contingent fees may vary from case to case depending on the circumstances, including but not limited to, the risk of recovery, the impact of the expense of the prosecution, and the complexity of the case.”

Attorneys should exercise sound judgment and use a percentage in the contingent fee contract that is commensurate with the risk, cost, and effort required. . . . Attorneys should discuss alternative fee arrangements with their clients. Id. at 13. The passage is not merely information given to clients, but is taken verbatim from a resolution on professional ethics regarding the use of contingent fees, adopted by ATLA’s Board of Governors in 1986. This resolution continues to be ATLA’s policy regarding the ethical obligations of its members.” [emphasis added]

As you might expect, many State trial lawyers associations adopted the same standard after ATLA did. (For an online example, see Georgia’s use of ATLA’s “Keys to the Courthouse,” here) The Naderite group Public Citizen, a strong ally of ATLA against the tort reform movement, and sponsor of major-impact tort suits, also told the Utah Supreme Court in July 2003:

“It is widely accepted that contingency fees should vary depending on the riskiness and complexity of the individual case; indeed, that is what the ethical rules currently require (even though almost universally honored in the breach).” [See, the ethicalEsq challenge to Public Citizen to fix the contingency fee system.]

The Federal Trade Commission, Bureau of Consumer Protection gives this advice in a brochure called Facts for Consumers: Hiring A Lawyer.

“[B]efore agreeing to a contingent fee, consider that: ” . . . . The size of a contingency fee, usually a percentage of any money you receive to resolve the case, is always negotiable. , , , Remember that there’s no particular percentage of a consumer’s recovery that constitutes a “standard” or “official” fee.

“The size of the contingency fee should reflect the amount of work that will be required by the attorney. Some cases are straightforward; others can be novel or uncertain. You may want to ask whether the case is likely to settle quickly and whether government agencies will gather significant amounts of evidence.”

Just a couple more examples for now:

As stated in a prior post, after considering the recent ABA Ethics 2000 Commission proposed changes to Rule 1.5 regarding contingency fees, the Arizona Supreme Court decided in 2003 to specify the important role of risk. Thus, it changed the traditional 8th factor to be considered in determining the reasonableness of a fee. Instead of the cryptic phrase “whether the fee is fixed or contingent,” Rule 1.5(a)(8) now says “the degree of risk assumed by the lawyer.” Combined with other Section 1.5(a) factors (such as “the time and labor required, the novelty and difficulty of the questions involved, and the skill requisite to perform the legal service properly”), it should now be clear in Arizona that the reasonableness of a contingency fee will depend on how much risk the lawyer assumed of working extensive hours without adequate pay, and how much skill and exertion it will take to perform the task. That appears to make applying a “standard” or uniform fee to each client unethical.

tiny check In addition, the new AZ Rule restores the clause “including consideration of the degree of risk assumed by the lawyer at the outset of the representation” to a new Commentary section [3], which discusses the reasonableness standard as applied to contingency fees. The final version of Ethics 2000′s proposal removed the clause, which had been part of prior drafts.

Finally, if we may cite a foreign source of legal principle, the Toronto personal injury law firm of Polten & Hodder has the following advice on its contingency fee FAQ page:

  • “Such fees are usually based on a percentage — often 20% to 45% of the proceeds. Such agreements may also be dependent upon various factors including the nature and complexity of the matter, the risk involved, the cost in pursuing the matter, and the likelihood of success.”
  • “The key disadvantage is less obvious. Generally speaking, a contingency fee will in the long run cost you more than if you were paying monthly as the matter progressed.”
  • “Be wary of the ‘straight percentage.’ You claim may settle early on. …You should try to arrange, therefore, what some lawyers call a ‘graduated’ fee arrangement, whereby the percentage fee increases as the matter progresses.”
  • “Make sure your contingency fee agreement contains a provision that you are entitled to have the lawyer’s fee reviewed by a Superior Court judge to ensure that the agreement is fair and reasonable and is void of improper motive or conduct by the lawyer involved. You should insist on this provision. Try to get your lawyer to agree that he or she will make this application if you require it and that he or she will pay the cost of doing so– not you!”
  • “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 $100,000.00 in fees down the road, it is money well spent.”

mushroomsF Now, go make my day: find this kind of advice on a p/i firm website in the USA.

tiny check For more on the topic of risk see our prior posts: 98% Win Rate: Where’s the Risk? (April 6, 2004)

tiny check This post is second in a series this week on contingency fee issues. Yesterday, April 2, 2006, we posted contingency fees: market failure.

update (July 28, 2008): See our post “a big bow for Judge Hellerstein.”

afterthoughts (April 4, 2006): A few more points for the sake of completeness: Various versions of lawyer ethics codes and rules have long made it clear that there could be instances where the risk is so low, or the likely fee so high compared to a reasonable flat or hourly fee (because there is comparatively little work to perform to achieve favorable results), that a contingency arrangement could be contrary to the client’s best interests. In such situations, the lawyer was expected to fully inform the client of the relevant factors and only use a contingency arrangement if the client then freely chooses to do so (in effect, deciding to assume the risk of overpaying rather than having to pay a smaller amount in a losing case). Thus, for example:

Comment 3 to Rule 1.5 of the Model Code preceding the Ethics 2000 version (still applicable in most jurisdictions), states “When there is doubt whether a contingent fee is consistent with the client’s best interest, the lawyer should offer the client alternative bases for the fee and explain their implications.”

Ethical Consideration-20 of the Model Code of Conduct states: ” . . . Although a lawyer generally should decline to accept employment on a contingent fee basis by one who is able to pay a reasonable fixed fee, it is not necessarily improper for a lawyer, where justified by the particular circumstances of a case, to enter into a contingent fee contract in a civil case with any client who, after being fully informed of all relevant factors, desires that arrangement. . . . “

Ethical Consideration-5-7 of the Model Code of Conduct states: ” . . . Although a contingent fee arrangement7 gives a lawyer a financial interest in the outcome of litigation, a reasonable contingent fee is permissible in civil cases because it may be the only means by which a layman can obtain the services of a lawyer of his choice. But a lawyer, because he is in a better position to evaluate a cause of action, should enter into a contingent fee arrangement only in those instances where the arrangement will be beneficial to the client.”

podiumSN Prof. Lester Brickman explained the importance of this traditional approach to contingency fees in a Letter to the Ethics 2000 Commission (March 23, 2000):

“The message of ECs 2-20 and 5-7 and the Comment to Rule 1.5 that the Commission is proposing to delete, is clear and compelling. Lawyers are obligated to counsel clients as to the fee arrangements that are in the best interests of their clients even if that advice is contrary to a lawyer’s financial self-interest. Clients have a co-relative fiduciary entitlement to be fully informed by their lawyer with regard to a proposed fee agreement. This is especially true in the contingency fee context where there is an extreme informational imbalance between lawyers’ knowledge of the extent of risk and value of the claim and that of clients.

“Most clients lack sufficient information upon which to base an informed judgment regarding the fee structure and hence must rely on their lawyer for that knowledge. To allow the lawyer to be guided by self-interest in that circumstance is simply intolerable. That is why the drafters of the Model Code and the Model Rules and [ABA] Informal [Ethics] Opinion 86-1521 as well as numerous courts have rejected the unregulated market in favor of imposing a fiduciary standard to regulate lawyer-client fee agreements.”

CalMap2 What can a prospective client do to understand the issues when trying to bargain over a contingency fee and assessing risk? If you live in California, you might be out of luck. For example, a conscientious lawyer or enterprising consumer could read the State Bar of California’s Sample Written Fee Agreement Forms for guidance. The Forms tell the lawyer that:

“A. STANDARD FOR DISCLOSURE Due to the consumer orientation of the statutes and the fiduciary nature of the attorney-client relationship, the statutes must be examined in the light most favorable to the client. Disclosures required by statute should be accompanied by all additional information necessary to make the disclosure complete, accurate, and not misleading. The statutory requirements should be considered minimum standards.”

That sounds good, and the Instructions and Comments section of the document is filled with suggestions to help the lawyer decide what information is necessary and desirable. However, this is the total discussion on fee negotiation:

“4. Negotiability of Fees (Par. 5): This statement is required by statute.”:

When you get to Form 3, the Sample Agreement for Contingency Fees (which is six pages long), this is the complete clause/section relating to negotiation of fees [at 24]:

“5. NEGOTIABILITY OF FEES. The rates set forth above are not set by law, but are negotiable between an attorney and client.”

CalMapG Still unenlightened? Maybe you could turn to the Consumer Attorneys of California, who (with such a friendly new name) surely take seriously their statutory obligation to tell clients of their right to negotiate. Well, maybe not. It seems they have decided to be rather vague about what factors might be relevant when negotiating fees. In fact, they totally avoid mentioning risk, winnability, or likely size of the recovery. Thus, in CAOC’s Selecting a Lawyer, after downplaying “cost” as a factor in choosing an attorney, they ask “What kind of percentage is fair and reasonable?”, and reply (emphases added):

“Some of the matters which affect the size of the percentages are the complexity of the case, the experience of the attorney, the expense of the case, and other factors. Some attorneys charge a different percentage at different stages in the handling of the case. No matter what kind of fee arrangement you make with an attorney, the attorney is entitled only to a reasonable fee. What is reasonable depends on many things. The fee is, of course, subject to individual negotiation. . . As previously mentioned, the lowest percentage may not be the best for a competent, well-qualified lawyer who could probably obtain a result which would more than make up for the difference in a lower fee charged by a less competent or trained practitioner.

That’s right, dear client: higher fees are probably better for you; the attorney is only entitled to a reasonable fee, and “What is reasonable depends on many things.” Aren’t you glad you asked?

mushroomsF You know, I’m beginning to understand why poor Jonathan Stein in California seems confused about the notion of risk and the ethical obligation to negotiate contingency fees. His p/i colleagues are all singing the old Mushroom Song for their clients.

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- Click for Part I (Market failures); Part II (risk matters)Part III (do “standard” fees still exist?); and Part IV (ethical duties) -

- see our farewell piece: “Understanding and Reducing Legal Fees” (Feb. 28, 2009)

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