f/k/a . . . the archives

April 8, 2006

contingency fees (pt. 3): do “standard” fees exist?

Filed under: — David Giacalone @ 2:34 pm

- This is Part III 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 Pity the poor personal injury lawyer — he just doesn’t have enough hands. In addition to a perennial gladhand, plus the one needed for patting his/her own back (over free services, selflessness, and gladiatorial courage), the p/i lawyer has had to weigh just how to talk about the contingency fee that gets presented to virtually every client, in p/i cases all over town. Thus:

tiny check On the one hand, the p/i bar in each State spent decades convincing the public (and eachother) that they charged a “standard contingency fee,” with connotations both that everyone used the same rate for all personal injury clients and that they sort of had to. For a long time, this “standard” was one-third of moneys recovered for the client.

tiny check On the other hand, some economists, legal ethicists and other observers, started talking about how unnatural and even unethical it was to charge the same “standard” fee, no matter how little risk a particular case presented of being unpaid or underpaid for hours worked and resources spent. This left self-anointed, good-guy “Consumer Attorneys” with a public relations problem, so some started insisting that there was no such thing as a “standard” contingency fee. Others, who actually thought one-third was just not quite enough, and wanted to start charging 40 to 50%, sort of liked the idea that there wasn’t “really” a standard — or, at least, that it was not a mere 33.3%. (see our prior post)

tiny check Yet (and this may require one’s using a Scalian set of fingers, in conjunction with a raised chin or two), the typical p/i lawyer still wanted to be able to use a standard rate (or standard tier of rates — such as 25%, 33.3%, and 40% — that depended on the stage at which the case was won). This would allow him or her to proffer the same rate (often pre-printed in the firm’s fee form) to virtually every client. It would also allow the firm to say that the rate must be reasonable, because it was what other clients accepted and all the other “quality” firms in town were also using.

- Any hypothetical firm that might offer below-Standard fees is thus characterized as sub-standard — surely too inexperienced or less skilled, and therefore less able to get the client the highest possible recovery. (Consumer Attorneys [formerly Trial Lawyers] of California’s Selecting a Lawyer makes this specious argument.)

questionDudeSN It almost makes you want to throw your hands up in confusion, or maybe join your hands in prayer for the plight of the misguided p/i bar — if not offer a sympathetic hug. Instead, though, I thought – with the help of an online thesaurus – that I would help clarify the actual situation out in the real world:

The vast majority of p/i lawyers who are seeking your business for typical personal injury cases (not class-action suits, where fees are reviewed by a court before being doled out to the lawyers) continue to offer a single percentage fee or, as stated above, a tiered or stepped “varied” fee, that is

(a) “standard” within their particular firm, and therefore offered to virtually every client (with that hope and expectation that it will be meekly accepted);

(b) “standard” across their locale, jurisdiction or State, so that the vast majority of firms can be relied upon to also proffer and use that rate — or, at the very least, refrain from any advertising that might suggest otherwise. Or,

(c) a “standard” rate that is in fact the maximum rate set by statute or regulation for a particular kind of case (i.e., medical malpractice), or the maximum allowed without specific authorization from a court or specific proof of special circumstances.

In coming to these conclusions, I have done significantly more than talk with p/i lawyers and consumer advocates across the nation. I have also engaged in considerable internet researchincluding a quick check at the Wordsmyth Thesaurus, where I learned that the adjective “standard means “serving as a model for measurement or comparison or as an accepted authority” or “normal, routine, usual,” and is also synonymous with “prevailing” and “common”.

Here’s some of our evidence (emphases added by Editor):

ATLA: In its submittal to the Utah Supreme Court, in 2003, which we discussed here, the American Trial Lawyers Association [which now calls itself the American Association for Justice] the stated: “Indeed, it is convenient to refer to one-third as the usual rate when explaining how contingency fees work.” That repeats ATLA discussion in both its “Keys to the Courthouse” and more-recent “Glossary of Tort ‘Reform’ [Civil Justice] Terms,” that:

“Contingency Fee: The contingent fee system is the ‘key to the courtroom’ for thousands of Americans. It allows people who suffered an injury to bring a suit without having to have the money up front to pay their attorney.

Rather than charging for legal services by the hour, an attorney agrees to accept a portion of any recovery in the case, “usually one-third.”

Further, in footnote 2 of an ATLA amicus brief to the U.S. Supreme Court, in 2002, it argued against the notion that “those clients who win subsidize the losers.” Instead, they amicus brief argues: “If it were the attorney’s only case, he or she would charge the same prevailing contingency fee.”

Georgia: Offering personal injury information to the public, Georgia’s trial lawyer foundation borrowed ATLA’s “Keys to the Courthouse: Quick Facts on the Contingency Fee System” (1994), including the statement that contingency fees are “usually one-third.” (and see their “What Is a Contingent Fee?,” which says “usually in the amount of one-third”.)

Tennessee: Here’s what the Tennessee Bar says about contingency fee rates:

“In some cases such as social security and worker’s compensation, there is usually a cap or limit on the percentage or the dollar amount that an attorney is permitted to charge. You should ask the attorney if there is such a limit and what it is. In most personal injury cases, there is not a limit on what the attorney can charge. However, generally speaking, a one-third contingency fee is the customarily accepted percentage that a lawyer will be paid from your award.”

[Ed question: If there's a statutory limit, why does the client have to ask the lawyer? Is that to remind counsel not to cheat, or to reassure the client that one-third is otherwise standard?]

New Hamphire: The New Hampshire Bar says “Contingency fee percentages of 33% are common. Any percentage in excess of 40% may be unethical.”

California: The Consumer Attorneys of California trial lawyer association states: “Rather than charging for legal services by the hour, an attorney agrees to accept a portion of any recovery in the case, usually one-third.”

SlicingThePie

Recently, your editor was called both too old and “too lazy to analyze the contingency fee in context.” Despite my apparent intellectual infirmities, I seem to have detected a pattern. Of course, I’d be pleased to hear there are exceptions to this constant barrage, which has tried to make one-third seem like the prevailing, customary, standard fee level in personal injury cases for several decades.

Perhaps more interesting, as I pointed out in 2003 in It’s Not Unusual (to take one-third), is the analysis of the U.S. Supreme Court when faced with a contingency fee case in Gisbrecht v. Barnhart, 535 U.S. 789 (2002). The Court concluded that attorneys successfully representing Social Security disability claimants in court may be awarded fees based on contingent fee agreements with their clients. Note that, by statute, contingency fees in Social Security cases are limited to 25%.

Justice Ginsberg wrote the majority opinion, joined by seven other justices, and Justice Scalia dissented. Here’s a little of what the Gisbrecht Court had to say:

“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.” Brief for National

Organization of Social Security Claimants’ Representatives as Amicus Curiae 2; see Brief for Washington Legal Foundation et al. as Amicus Curiae 9, n. 6 (“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.”).

In antitrust jargon, we’d say that the maximum price has become the floor — no price competition. Please note that Justice Scalia did not dissent because he came to a different understanding on the existence of a standard contingency fee in SSD cases:

“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.”

checkedBoxS My conclusion from 2003 still stands: It seems perfectly fair to call a contingency fee “standard,” when it is “prevailing” and is “usually” offered to clients. Ditto when the statutory maximum is used “characteristically” and “in virtually every case” for Social Security claims.

There has, however, been one much-cited study that purports to show that no standard fee exists (in Wisconsin). It is Seven Dogged Myths Concerning Contingency Fees (Wash.U. Law Q, Fall 2000), by Prof. Herbert M. Kritzer, of U. Wisconsin-Madison. The Study is discussed and debunked at length in a prior post.

tiny check Kritzer used a small sample of cases, supplied by volunteer participants who had a vested interest in helping Kritzer “debunk contingency fee myths”, and who also selected which cases they reported. Nonetheless, Kritzer concluded that “on the order of 60% of the cases employed the standard one-third contingency fee.” Of those that didn’t use a flat 33%, many charged [what I would call the new or alternative standard] a variable fee that started at 25% or 33% and went to 40% or 50%. It seems clear then that a very large percentage and number of consumers in Wisconsin are presented with only a contingency fee option and are forced to accept a flat rate of one-third or a varied rate that result frequently in fees of one-third or more.

Beyond not disproving the existence of a standard fee, Kritzer in no way helps quantify the key question in my suggested (traditionalist) approach to contingency fees: How many lawyers are willing to negotiate and tailor the fee arrangement to the particular client’s situation, while giving the client enough information and objective advice to make an intelligent choice?

Furthermore, Kritzer actually helps support my position, because he argues against the supposed myth that p/i lawyers take every case that walks into their doors. No sane observer of the legal scene believes that myth or mouths it. 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 big jackpots). (Read about Schenectady, NY, lawyers who boast of a 98% Win Rate, “most often” charge one-third, and I bet reject a lot of clients)

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.

In his article Effective Hourly Rates of Contingency-Fee Lawyers: Competing Data and Non-Competitive Fees, 81 Wash.U.L.Q. 653 (2003), Lester Brickman, Professor of Law, Benjamin N. Cardozo School of Law of Yeshiva University, recognizes that the existence of a standard fee system injures consumers and shows the existence of market failure [at fn 160]:

“Even the bar recognizes that reliance on competitive forces to drive down inordinately high contingent fees is not an effective regulatory strategy. One clear indicator of the inadequacy of reliance on market competition to exert downward pressure on contingent fees is the fact that contingency-fee lawyers do not engage in competitive fee advertising.Moreover, even if a claimant were to obtain “more information about fees,”he would simply discover that fees are standard and not subject to bargaining. Though some claimants do shop around for lower pricing, they quickly find out that lawyers are unwilling to bargain over the fee percentage. As a consequence of these lawyers’ practices, claimants are discouraged from seeking lower prices by shopping and bargaining because they have learned what lawyers have intended for them to perceive: that there is a standard industry practice of maintaining uniform pricing, and price shopping is therefore futile.”

podiumSN As I stated in my earlier post on Kritzer, the focus of my analysis of the “reasonable contingency fee” is the individual lawyer’s ethical, professional and fiduciary obligations to the individual client. That’s what legal ethics are about.

What’s happening or not happening on the macro-level can reinforce or deter anti-consumer and anticompetitive practices, but can’t justify a failure by the lawyer to give each client undivided loyalty — even when it comes to fees or to pressure from partners to generate profits.

No client should be asked to subsidize other clients with riskier cases. And, 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. Beyond its failure to present valid data, Kritzer’s study does not help us gauge the ethical significance of a system that consistently uses contingency fees bearing little or no relationship to the risk and work facing the lawyer.

In fact, a typical personal injury client still faces a “standard” contingency fee. This means that trial lawyer talk about the ethical obligation to use risk-based fee agreements – although correct as to legal ethics – is hollow public relations posturing. (see our prior post risk matters)

From p/i lawyers? Shocking. For their acting ability, however, we should perhaps give them a hand.

tiny check On April 1, 2005, our Prof. Yabut had a dream in which an apocryphal “ATLA” declared the Standard Contingency Fee to be unethical, and adopted The Injured Consumers’ Bill of Rights for Contingency Fees. We can hope that it will someday soon be a dream that comes true.

p.s. It appears that there is no shortage of p/i lawyers in cases that have statutory limits of 25%. Are medical malpractice suits really less risky than typical auto accidents? Whey are auto accident plaintiffs forced to pay one-third or more so often? In California, lawyers are required to tell medical malpractice clients (in their fee agreements, though not orally), that the 25% figure is a statutory maximum and they have the right to negotiate for a lower amount.

Do any California lawyers negotiate? Do any fill in a number lower than 25% before handing the Agreement to the client (now, I must be hallucinating)?

afterthought (April 6): If you are a p/i lawyer who offers potential clients Contingency Fee Agreements that are based on a sliding scale of perceived risk (based on your experience and good judgment), we’d be happy to create a page listing details about your practice and contingency fee policy.

more afterthought (April 7, 2006):(April 7, 2006): For years (and as recently as this week), I’ve heard p/i lawyers insist that they can and do make up for the deficiencies of the standard contingency fee by rebating or discounting the fee at the backend of a case. From the economic/competitive perspective, this “secret” or hidden discounting, while publically upholding a no-price-competition position across the industry, deprives consumers of the benefits of price competition, and strengthens market failure, keeping overall contingent fees artificially high.

Such “rebates” are also ethically insufficient, even if we could believe that they are widespread and large enough to make the client whole. The ABA’s Formal Ethics Opinion 94-389 (influenced by Model Rule 1.5(a), which says “A lawyer shall not make an agreement for, charge, or collect an unreasonable fee”), correctly assumes that the fee will be structured to be reasonable when the contingency arrangement is entered. No client should have to hope or beg for a discount, attack a signed retainer contract, or be at the mercy of the lawyer’s notion of post-recovery fairness in order to achieve a reasonable fee.

- That does not mean that a p/i lawyer whose case is successfully concluded much sooner than anticipated, or for a lot more money, shouldn’t use his or her own standard of ethics or fairness in deciding to take a smaller fee than called for in a retainer contract.Codes and Rules are minimums, they never stop any lawyer from treating the client better than is required to avoid discipline or a guilty conscience.

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


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