The Contingency Fee Under Attack

Maybe its the rain we have had on and off for the last several weeks. Or maybe it is my lack of hitting the gym lately. Or maybe it is getting tired of listening to people criticize my practice area. But, I am a bit grumpy as I write this. And I am grumpy of being attacked for being a personal injury attorney and working on a contingency fee.

Let me start with some background. The "tort reformers" in the world are currently feeling very powerful. (I use the expression tort reform loosely. The only reform is taking away the citizens rights to sue.) They have a pro-reform President, a group of pro-reform legislators and help from big business. (Just for the record, as the son of a business executive, I am all in favor of big business, just not in favor of their efforts to reform our justice system.) And now they get help from professors and attorneys.

First, we should all be very clear. Once they take away or limit a citizens right to sue for damages, it will be forever gone. Someone won't suddenly wake up and decide they did the wrong thing.

Second, once they start limiting rights, it is not going to stop. If you can limit the rights of a products liability plaintiff to sue, why not limit the rights of a car accident? Why not limit the rights of an intentional tort victim, since, after all, those damages cannot be covered by insurance? Why not limit the rights of those injured by the government? You may call me chicken little, but no one has answered these questions to my satisfaction.

Third, a lot of you are suddenly going to find yourself out of work. Plaintiff's attorneys will need to find new work, guaranteed. Civil defense attorneys will then need to find new work, since no one is going to be sued. Insurance coverage attorneys are next. Since they can then limit lawsuits against insurers, there won't be a need to get an opinion on coverage. Regulatory attorneys will be out of work in the insurance industry as well. Then the government attorneys involved in insurance. Civil attorneys for the government will be reduced. You see my point, I assume.

Finally, and this is what really set me off on this, the contingency fee is under attack, and it is under attack by people who just don't get it. For example, there are some poetry writing attorneys, who are not even practicing and have never handled PI work, but argue that the contingency fee (sometimes called the "standard contingency fee" which is garbage by itself) is unfair. Of course, he also criticizes value billing. Interestingly, I do not see him criticizing the hourly fee, which in some instances is $500 per hour or more. I guess he is either too old to come to terms with anything other than the hourly fee, too lazy to analyze the contingency fee in context, or too afraid of being left behind by the times.

Instead of talking about this in a general sort of way, or talking in theory, or writing stupid April fools posts, we can discuss this with actual cases. For example, I have a client who was offered $500 to resolve her case where she required back surgery. Yes, a whole $500. I became involved in the case, filed suit, and settled the case for the defendant's policy limits - a whopping $15,000. Assume for this argument that I take the standard 1/3 of the settlement, or $5,000. My client is left with $10,000. This is substantially better than she would have done by taking the insurance company's offer. However, some will still say "But, Jon, your fee is too high." Okay, so let me break it down for you a bit. I have about 75 hours into the case. At $200 per hour, my bill would be $15,000. In the contingency fee context, my effective hourly rate is $66.67 per hour. (By the way, the $200 per hour is more than reasonable, since I charge more for that when I handle insurance claims cases as an expert witness.) How many of you want to work for $66.67 per hour?

Okay, fine, how about another example? I wrote before about the widow whose husband was killed while he was crossing the street. The defendant has no assets, is going to be deported, and his parents have no assets. I settled the case and took a fee of nothing. That is right: no fee. That makes my effective hourly rate ZERO.

Are there cases when I settle a case quickly? Absolutely. Do I reduce my fee? Every single time. Sure, I sometimes make $200 per hour. It is the nature of the beast.

However, I never know when I take a case how easy or complex it will be. It is impossible to predict. While some people want attorneys to contemplate the complexity of the case before signing the fee agreement, it can never happen. We just will never know enough about a case until we are working on it and have signed up the client.

How can I be sure? Well, the 8,000 plus cases I settled as an insurance adjuster give me a pretty good indication. Some cases are relatively easy. Some are quite complex. Some get into coverage issues that will blow you away. But most of my clients, about 90% of whom are low income, could never afford me if I charged them hourly. (Of course, this is why I joined the Law School Consortium Project as well.) And none of this takes into account the interest free loan I give my client when I advance costs on a case.

So, before you sit around and write haikus and dumb April fools posts, take a minute, or a month, or a year, to handle PI cases. See what it is like in the trenches to help people. And then, and only then, can you have a meaningful discussion about it. Oh, by the way, if anyone wants to have an open debate about the value of a contingency fee and the "standard" contingency fee, I am more than happy. I am sure we can set up a conference call via the internet, but you better come prepared.

There, now I feel better. Off to watch more March Madness even with the Maryland Terrapins.

------Jonathan

Comments

[Stella Gomez Seitz]

If there were NO contingency agreements, a lot of people would not be able to get compensation for injury. What is wrong with all these bleeding liberals? I am not an attorney but attorneys who work PI cases have to pay rent, eat like everyone else and pay their staff, electricity, A/C, etc. Ok, if I see attorneys advertise on TV, I would not hire them but the ones with integrity who work hard for their clients, let's give their due thanks!

[Ben Glass]

Two comments about contingent fees:

First, I've never had a client complain about the fee. Complaints, I am convinced, come from those who would be perfectly happy if all claimants just went away so that the tort feasors could go on their merry way without paying for damage they cause. I am firmly convinced that all efforts to change the contingent fee system are simply designed to run plaintiff's lawyers (and as Jonathan points out, eventually all lawyers) out of business.
Second, we began experimenting with a contingent fee schedule coupled with an opportunity to have the case billed on an hourly rate. We fully explain everything to the client and give them the choice. Some folks who have come to us with decent offers have paid us hourly and been fully satisfied with the ultimate outcome. Others have had their cases settled for perhaps less than "full value" but in an amount, that when coupled with our contingent fee schedule which gets some cases settled for a 15% attorney fee, gets them a fair amount of money in their pockets.

I think that lawyers should take a close look at how the contingent fee looks from the client's point of view... fully explain everything, and give the client as many reasonable and fair choices up front as they can.

[Jonathan]

David -

I will address these again one by one.

First, in California, I have enough to worry about with the State Bar ethics opinions that I do not read the ABA opinions. California has its own set of rules and opinions which apply to my practice area. Further, the ABA can give me their list of factors, but until the list of factors includes insurance for any of the people involved, complexity of the coverages, policy limits, etc... they are missing the boat too.

Second, as to negotiability, you make a lot of assumptions for someone who has never handled PI cases. You assume that the blanks are filled in. I fill in the percentages when I meet with clients. It is done in front of them and I explain to them that they can go look for an attorney with a different fee structure. (For the record, I do not do the 33%/40% that you keep talking about, but again you like to make assumptions.) I go through my entire fee agreement. I am not sure how much clearer I can make it than what is written in my fee agreement. Apparently the fine folks at the California State Bar think that clients can understand it since it is in their sample fee agreement.

Third, as to your "Injured Consumers’ Bill of Rights for Contingency Fees," that is great, but isnt that akin to me making a "Divorcing Couples Bill of Rights for Your Fees?" I have no business writing any sort of bill of rights without having first hand experience. You keep skipping that part of the step. You don't know what we do, how we practice, or what is involved in the settlement of a PI case. Yet, you continue to come up with these ideas that you then try to pawn off as ethical.

Fourth, as to the Standard rate, the law.com definition matters to me not. It is some person's idea. I know a lot of attorneys in Sacramento who charge differently. There is no standard in my area, and ATLA saying it is "usually one-third" could be based on any number of things, including just what the public expects.

Fifth, as to the case-by-case analysis, a lot of PI attorneys do a good job weeding through cases. However, we do so based on 60 or 90 minutes worth of information. We do not do so based on the hours we then spend on the file. The easy cases don't usually end up with an attorney. The easy cases are not the ones that people need help with. It is the challenging cases. And how many of my cases end up with challenges? At least half. Why? For a variety of reasons, including clients not telling me everything because they dont realize that some things are important, insurance companies and/or defendants not being honest, or a variety of other bizarre events that may occur.

Of course, all of this discussion about ethics and fees leads me to one question I still have not received an answer to: is it ethical for someone who has no experience in a practice area to give advice to consumers about that practice area? California Rule of Professional conduct 3-110 would seem to indicate no. Yet, here you are writing a bill of rights for injured people when you have never handled PI work. Is that ethical?

[david giacalone]

Jonathan, I hope you recall that this all started when I mentioned to you that p/i lawyers would do a lot more for their clients by negotiating fee levels based on risk than by worrying about the image or dignity of lawyers, which seemed to be your focus lately. (I've been fighting for the free-speech advertising rights of p/i lawyers for decades.) I did not launch a new attack on contingency fees and I have no connection with the tort reform movement.

I'm a bit worried that the ideas I have raised are new to you, since they were laid out so explicitly in ABA Formal Ethics Op 94-389. That Opinion gave a long list of risk-related factors that should be discussed with every client before entering into a contingency fee agreement. It stated that "any lapse from the applicable requirements by some members of the profession simply suggests that the profession should redouble its efforts to assure that the ethical obligations associated with entering into a contingent fee arrangement are fully understood and observed." I have been attacked by the p/i bar from the first moment I attempted to spread the word on Op. 94-389.

As for your latest replies:

NEGOTIABILITY: It is not sufficient to hand an unsophisticated prospective client a fee agreement with the percentage contingency fee already filled in, and then merely have a sentence in the agreement saying the fee is "negotiable." As a fiduciary and professional, your obligation is to make sure the client knows what that means and has sufficient information to bargain intelligently. I took the Opinion 94-389 factors, plus some of the language used in Florida's disclosure rule and created the "Injured Consumers’ Bill of Rights for Contingency Fees" -- http://media-cyber.law.harvard.edu/blogs/gems/ethicalesq/BillofRightsforContingencyFe.doc

That Bill of Rights tells the client, among other things, that "You, the client, have the right to talk with your lawyer about the proposed fee and to bargain about the rate or percentage as in any other contract. . . . The percentage fee charged to you should reflect the likelihood of winning, how much money is likely to be rewarded and collected, and how much work and expense the lawyer is likely to put into the case. Your lawyer’s expertise and the complexity of the case are also relevant. . . Your lawyer should take all the following factors into account in evaluating your case and should discuss each factor with you, giving his or her best good faith evaluation" [list of factors relevant to likely risk follows].

Despite the Florida requirement that every client be told in writing of the right to negotiate the fee, I've been told by p/i lawyers there that virtually no lawyer will negotiate, even when asked. I've been contacted by a person with a claim in Florida (apparently worth 7 or 8 figures); it seems that firms want the case, but absolutely refuse to negotiate from the maximumx set forth under Florida law, even though the liability of the deep-pocketed defendant appears to be certain.

"STANDARD Contingency Fee" Long before there ever was a Tort Reform movement, tort lawyers were telling clients that the rate they put down in their proffered fee agreement was the "standard" rate. Perhaps, other synonyms were used (e.g., customary, prevailing) but the impression purposely given to the client was that "this is the rate we all charge." The lack of price competition in all those p/i ads was another sign to the public that there was only one rate available.

The Law.com Dictionary definition for "contingency fee" includes this sentence: "Although fees are negotiable, a standard contingent fee in accident cases is one-third of the money won, unless particular difficulties exist with the case." http://dictionary.law.com/default2.asp?selected=330&bold=%7C%7C%7C%7C

In 1989, after winning a narrow victory over tort reformers, the President of the Florida Bar also used the term "standard fee", in an article warning that "many, many cases that clearly do not" warrant the then-prevailing rate. See http://blogs.law.harvard.edu/ethicalesq/2003/07/16#a115 .

Also, in this post -- http://blogs.law.harvard.edu/ethicalesq/2003/09/05#a248 -- I gave examples of ATLA using the term "the prevailing rate", and it stating, in a definition of contingency fees, that "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."

Whether a fee (in non-class-action cases) is called standard, customary, or prevailing, there can be little doubt that most p/i lawyers in any one locality charge virtually all of their personal injury clients the same percentage fee. Out of custom, I use the term "standard." The main point, however, comes from Op. 34-389, which said: " "a lawyer who always charges the same percentage of recovery regardless of the particulars of a case should consider whether he is charging a fee that is, in an ethical context, a reasonable one."

STANDARD AS MAXIMUM: In virtually every jurisdiction, there is a percentage rate that is the maximum a lawyer can charge in a contingency agreement, unless the lawyer proves special circumstances to a court. The rate can be set by court rules, ethics rules, or statute -- or even judicial precedent. What's the best way to find out what the rate is? See what the "standard" rate is in your town.

CASE-by-CASE Fee Levels: It seems fairly clear that successful tort lawyers already do a very good job of weeding out losers, and in most cases can do a pretty good job of assessing the likely risk of a case prior to entering into a contingency agreement. [one study by an expert on legal fee ethics found that tort lawyers prevail in about 90% of the cases they accept - http://law.wustl.edu/WULQ/81-3/653Brickman.pdf .] I do not doubt your anecdotes, but I do wonder what share of your cases turn out to have such surprising twists and turns.

Of course, you will at times make a bad assessment. If there were no such risk, no p/i lawyer could ever justify charging more than the equivalent of a reasonable hourly fee. Currently, however, all of the risk of a case being "too easy" is being shouldered by the client -- the injured party, to whom you owe fiduciary obligations and whose interests you swear to put before your own. As I mentioned earlier today, the fact that some p/i lawyers "give back" or don't take part of the contractual fee amount, when doing so seems unfair to the client, is not a sufficient safeguard for clients, either in particular cases or in general.

[Evan]

I once had a long weblog-based discussion about contingency fees with David Giacalone and others at Legal Underground. Here's the link: http://www.legalunderground.com/2004/05/weekly_report_x.html.

[Roy L. Glass, Esquire]

I am an attorney with nearly 30 years experience in personal injury, medical malpractice, insurance disputes.

In Florida, the contingency fee contract is strictly regulated by The Florida Bar, the same organization which regulates and disciplines attorneys.

Upon the successful conclusion of the case, my policy is generally not to collect a contingency fee which exceeds the net to the client. Also, I have at times, waived some or all costs advanced to facilitate settlement---and, when necessary, have compromised my fees.

Most experienced and respected attorneys I know do the same.

Many of us advance tens of thousands of dollars or more out of our own pockets to prosecute our client's cases. Many of us devote years of very stressful work in some cases. Sometimes, all is for naught and we collect absolutely nothing.

I know of very few people, including attorneys, who could afford to pay hourly for such representation, including me.

We live by the sword and die by the sword of contingency fee cases. Our cash flow is often negative, up and down, and we routinely
dip into our credit lines. So, when we do have a significant recovery, we typically retire some debt, retain some to finance operations, and if we are really fortunate, fund our retirment accounts and buy toys.

It can be an extremely stressful practice, the challenges great, but also emotionally and financially rewarding. The trial attorney
is a breed of advocacy not all are suited for
and for those among us that do it, we would have it no other way.

The contingency fee is the great equalizer, enabling access to courts for the majority of people who would otherwise be disenfranchised of their constitutional rights.

[Jonathan]

David -

Let me see if I can respond to these one at a time.

First, never have I heard anyone, including ATLA or any of the hundreds of trial lawyers I know, call this a "Standard Contingency Fee." That seems to be a term made up by tort reformers.

Second, as to letting clients know, here is the language from my fee agreement:
"5. NEGOTIABILITY OF FEES. The rates set forth above are not set by law, but are negotiable between an attorney and client." That looks pretty clear to me. This is language suggested by the State Bar of California and can be found in their sample fee agreements. Every fee agreement I have seen contains this language.

Third, as for the maximum rate allowed by a jurisdiction, there is none in my jurisdiction. I am not admitted in other jurisdictions, but I am not familiar with any maximum rate allowed.

Fourth, again, every attorney I know takes these factors into consideration upon settlement of the claim. When a case settles, we look at the resolution, figure out how long we spent, what we did for the client, and how we added value. However, you would like us to do this BEFORE we settle the case, and that is just not possible.

For example, a client can have what appears to be a simple claim. Then, maybe, it turns out that their insurance company denies coverage. In California, that would make the client a Prop 213 case. (For those of you who do not know, Prop 213 limits recovery to economic damages only.) Then, we get into a coverage fight with our client's carrier to get coverage reinstated. Now, it is not a simple claim, and had I signed a fee agreement with the client for a lower fee thinking it was a simple claim, I would not be fairly compensated.

So, since you have absolutely no PI experience, tell me how you would figure out what to charge a PI client in a case when the client comes to you shortly after the accident? It is not possible to take into consideration all of the factors before a case is resolved. Again, I have settled over 8,000 claims. None of them are the same. If I cannot figure out whether a case will be simple or complex when I first meet with the client, how can you? It seems to me that you want to set an impossible standard that will never be met, thus essentially putting an end to PI work.

[david giacalone]

p.s. If you are trying to read any of the posts linked in my prior Comment, please excuse the inconvenience. The server for my weblog appears to be down this morning -- I have not been able to access it. Please try again later today. Thanks.

[david giacalone]

Since you are clearly talking about me (without linking) and have distorted my positions, I thought I would try to respond briefly. My weblog f/k/a [formerly known as ethicalEsq] has been focused on the rights of the "average" legal client and the application of legal ethics rules from the client's perspective since it began in May 2003. Your readers can find it at http://blogs.law.harvard.edu/ethicalesq/ .

As I have often written, my beef is not with the use of a contingency fee, which has many useful purposes; it is with the abuse of that concept. My main focus has been on the practice of presenting the same rate, almost always the maximum rate allowed in a jurisdiction (which has been called the "Standard Contingency Fee" by ATLA and most personal injury lawyers for decades) -- to virtually every client, while not letting the client know that the "standard" fee is not set by law but is instead negotiable.

The Association of Trial Lawyers of America has often stated that attorneys should "exercise sound judgment in using a percentage in the contingent fee contract that is commensurate with the risk, cost and effort required." That is what is demanded by our ethical rules. [See ABA Formal Ethics Rule 94--389 (1994)] But, America's p/i lawyers no longerr put this obligation into practice. Instead, they demand to be one-third (or more) partners with the client, no matter how little value they add to the client's claim for the client's injury.

I've written on and researched this issue for many years, with no personal financial interest, and have never been part of the tort reform movement. For example, see

Challenge to Public Citizen: Help Fix the Contingency Fee System -- http://blogs.law.harvard.edu/ethicalesq/2003/07/16#a112

A Bar President (and P/I lawyer) Writes about Contingency fees - http://blogs.law.harvard.edu/ethicalesq/2003/07/16

It's Not Unusual to take One-Third [yes, there still is a "standard" fee] - http://blogs.law.harvard.edu/ethicalesq/2003/09/05#a248

Suggestions for the ABA/TIPS Contingency Fee Task Force - http://blogs.law.harvard.edu/ethicalesq/2004/01/07#a482

Each lawyer owes loyalty to one client at a time. Each case taken on contingency must be evaluated for its own merits and risk -- and the client allowed to negotiate and ultimately charged a reasonable fee related to that risk. You may be different, Jonathan, but the typical p/i lawyer assesses each case before accepting it, and rejects the ones that do not appear to be very likely winners. When the lawyer charges virtually every client accepted the maximum percentage allowed in the jurisdiction, many clients are by definition overcharged -- they cannot all be the most high-risk cases. [You may be fair after the fact, Jonathan, but it is not sufficient for p/i lawyers to say that they will discount the fee at their discretion at the end of a case.]

As for "Value Billing", once again, I make no blanket condemnation. What I do question is the use of Value Billing as a ruse to charge clients MORE than they would be charged under hourly billing. E.g., "Value Billing or Venal Bilking" - http://blogs.law.harvard.edu/ethicalesq/2004/02/17#a821 . And, "ethics aside" - http://blogs.law.harvard.edu/ethicalesq/2005/04/08#a3634 .

The entire thrust of my ethics commentary has been against the excessive search for profits by lawyers, and the belief that they are "worth" such large fees. [see, e.g., "Prof. Schiltz's Sermon should be Required Reading" - http://blogs.law.harvard.edu/ethicalesq/2003/09/27#a296. If I do not often focus on $500 hourly fees, it is because (1) it is so obvious that I believe they are excessive; (2) the little-guy client who is my focus does not usually deal with such lawyers, and (3) businesses who do are proving more and more capable of fighting such fees.

Your defensiveness and inability to understand distinctions in my arguments, and to make objective analysis of them, make you look bad, Jonathan.