RHETORIC AND REALITY . . .
USES AND ABUSES . . .
CONTINGENCIES AND CERTAINTIES:
THE AMERICAN CONTINGENT FEE IN OPERATION
Herbert M. Kritzer
Department of Political Science
University of Wisconsin — Madison
1050 Bascom Mall
Madison, Wisconsin 53706
Disputes Processing Research Program, Working Paper 12-2 Institute for Legal Studies
University of Wisconsin Law School 608-263-2545
*
The preparation of this paper was supported by my Glenn B. and Cleone Orr Hawkins Professorship. This is an extensive revision of a paper presented at the Conference on the Law and Economics of Litigation Reform, sponsored by the John M. Olin Law & Economics Program at the Georgetown University Law Center, October 28-29, 1994. I would like to thank Professor Warren F. Schwartz for organizing the Conference, other participants in the conference (particularly my commentator, Michael Gottesman) for the valuable reactions to the paper, Dr. Lawrence Stiffman for his extensive comments on the earlier draft and for assistance in regards to several state bar economic surveys conducted by his firm (Applied Statistics Laboratory), Tracy Wahl for her excellent work in tracking down potential sources, Nancy Paul of the University of Wisconsin Law Library for securing a number of obscure items, and George Brown of the State Bar of Wisconsin for making available a variety of materials, both published and machine readable data.
**
Professor and Chair of Political Science and Professor of Law, University of Wisconsin — Madison. 1Proposition 202 lost by only 140,000 votes (2,546,000 yes to 2,686,000 no); two other related propositions (one which would have created a no-fault compensation system and one which would have affected securities litigation, including a loser pays rule) lost overwhelmingly; see Stephanie Simon, “The Propositions; Local Elections; Margin Leaves Mixed Verdict for Lawyers,” Los Angeles Times (March 28, 1996), p. B1.
2
See the "Lawsuit Reform Act" (Section 5, "Equity in Legal Fees"), Senate Bill 300, 104th Congress. Measures containing similar elements have been introduced into the legislatures of at least four states: Alabama (H.B. 823 [1996]), Michigan (S.B. 27 [1995]), New Hampshire (H.B. 1050 [1995]), and Texas (S.B. 27 [1995]).
RHETORIC AND REALITY . . . USES AND ABUSES . . . CONTINGENCIES AND
CERTAINTIES: THE AMERICAN CONTINGENT FEE IN OPERATION
*Herbert M. Kritzer
**INTRODUCTION
In March 1996, California voters narrowly rejected a referendum, Proposition 202, which would have radically changed the way Californians paid for legal representation in pursuing claims for injury compensation.1 The California proposal, and similar reform proposals at both the national and state levels,2 starts from the assumption that contingent fee lawyers routinely take advantage of inexperienced clients in ways that result in overpayments to the lawyers while depriving the clients of just compensation. The contingent fee “reforms” will, according to their backers, prevent lawyers from reaping excess compensation, encourage defendants to settle, and lead to quicker resolution of claims. A proposal incorporating these limitations on contingent fees
3
Brickman, Horowitz, and O'Connell, RETHINKING CONTINGENCY FEES [henceforth, "Rethinking Contingency Fees"] (1994); see also, Horowitz, Making Ethics Real, Making Ethics Work: A Proposal for Contingency Fee Reform, 44 EMORY L. J. 173 (1995).
4
Id. ("Rethinking Contingency Fees"), at 22-23.
5Id. at 20-22; see also, Brickman, "Contingent Fees without Contingencies: Hamlet without the Prince of Denmark? 36 UCLA L. R. 29 (1989).
6
"Rethinking Contingency Fees," supra note 3, 3, at 13. 7
See, for example, Brimelow and Spencer, The Plaintiff Attorneys' Great Honey Rush, FORBES 197 (October 16, 1989).
8
Corboy, Contingency Fees: The Individual's Key to the Courthouse Door, 2 (4) LITIGATION 27 (1976). was widely circulated in 1994 by the Manhattan Institute (a conservative thinktank).3 The stated premise of the Manhattan Institute proposal is that many contingent fee cases yield excessive payments to lawyers.4 The authors of the proposal argue that such payments arise because the risk of nonpayment is low or nonexistent in many contingent fee cases5 and the risk premium reflected in contingency fee agreements is "substantial."6
Debates over the contingent fee are by no means new. Commentators and observers, here and abroad, see the prevalent use of the contingent fee as the key element that makes the American civil justice system unique in the world. In the United States, doctors, accountants, insurance companies, and other civil justice reformers attack contingent fees as encouraging unwarranted litigation and yielding windfall payments to lawyers.7 In response, plaintiffs' lawyers and consumer advocates praise the fee as the little guy's key to the courthouse and as creating incentives for the large and powerful to exercise care.8 Foreign commentators and reformers fluctuate between condemning such fee arrangements as leading to potentially unprofessional
9
Benson, THE ROYAL COMMISSION ON LEGAL SERVICES, FINAL REPORT [Volume One] 177 (1979). 10
Law Society, Improving Access to Civil Justice [published memo] (1987); Swanson, The Importance of Contingency Fee Agreements, 11 OXFORD J. OF LEG. ST. 193 (1991). Trebilcock, 1989. "The Case for Contingent Fees: The Ontario Legal Profession Rethinks Its Position," 15 CANADIAN BUS. L. J. 360 (1989).
11
This point was noted by the president of the American Trial Lawyers Association in a response to the Manhattan Institute proposal; see Nace, No End in Sight in Debate Over Contingency Fees, NATIONAL L. J. B15, B19 (August 1, 1994).
12
See "Rethinking Contingency Fees," supra note 3, 3, at 55n24. 13
There is no question that there are cases in which there is little or no doubt about payment and that there are cases in which lawyers obtain fees that, on an hourly basis, are very high. One need only refer to Joe Jamail in Pennzoil v. Texaco who is reputed to have received a fee of around $420 million; see Brimelow and Spencer, supra note 7, at 204). The NATIONAL LAW JOURNAL 15 (September 13, 1993) reported a case in which a judge approved a fee of 1/6 of a recovery worth about $50 million that worked out to about $4,000 per hour. The judge concluded that the attorney should not be "penalized for achieving an easy victory"— one that gave the plaintiffs represented by the lawyer more than a full recovery of their losses, even after deducting the lawyer's fee.
14
See Bergstrom, COURTING DANGER: INJURY AND LAW IN NEW YORK CITY, 1970-1910 (1992), 88-91.
conduct by lawyers or encouraging actions that should be discouraged,9 and suggesting that contingency arrangements are necessary to provide access to justice.10
The Manhattan Institute proposal, and the specific legislative proposals it has generated, are indicative of how little we actually know about how the American contingent fee works in practice.11 For example, while the authors of the Manhattan Institute proposal provide examples of cases that illustrate the issues that they raise (e.g., effective hourly fees in the $1,000s or $10,000s, or more),12 these specific examples tell us little about the working of the fee in practice.13 What percentage of cases yield fees in excess of $1,000 per hour? Is it 10%, 1%, .5%, .1%, .01%? How much uncertainty is there in various types of cases handled on a contingency basis, and what is the nature of that uncertainty? This lack of understanding is surprising, given the 100-year history of contingent fees in the United States.14
This is not to say that there is no systematic, empirical research on contingent fees. There is a research literature. However, that literature is limited, both in the scope of what it examines
15
This is something of an overstatement because contingency arrangements (at least elements of such arrangements) have been used by defense lawyers in civil cases (see Litan and Salop, Reforming the Lawyer-Client Relationship Through Alternative Billing Methods, JUDICATURE 191, 195-96 (1994).
16
Grady, Some Ethical Questions About Percentage Fees, 2(4) LITIGATION 20 (1976).
and, as I will argue in the conclusion, in the analytic framework it applies. The standard approach to understanding the contingent fee examines the case-level incentives for the lawyer and the potential these incentives create for conflicts of interest between lawyer and client. While this focus may be useful for considering certain legal ethics issues, it ignores other issues that are equally important, particularly as they relate to access to legal services. From the legal services viewpoint, one must look beyond the individual case to consider economics at the level of the practice. I return to this in the conclusion.
Contingent Fees: The American Model and Alternatives
The standard description of the contingent fee is "no win, no pay." That is, a litigant has to pay his or her attorney only if the litigant in some sense wins the case. In practice, contingent fees apply almost exclusively to matters involving the payment of money (although this need not be the case). The American contingent fee is a specific type of "no win, no pay" arrangement: the attorney receives a percentage of the amount recovered from the other side.15 Thus, the American contingent fee is actually a commission or percentage fee,16 much like the commission paid to a real estate broker who receives no fee if the property does not sell.
While many observers assume that contingent fees are unique to the United States, it is only the American contingent fee that is unique (and perhaps not as unique as many think). Several countries permit "no win, no pay" fee arrangements:
17
Skordaki and Walker, Skordaki, Eleni and Danielle Walker. 1994. REGULATING AND CHARGING FOR LEGAL SERVICES: AN INTERNATIONAL COMPARISON (1994) 36.
18See Minish, The Contingency Fee: A Re-Examination, 10 MANITOBA L. J. 65, 69 (1979). 19
On these factors, see Watson, Bogart, Hutchinson, Mosher, and Roach, CIVIL LITIGATION: CASES AND MATERIALS [Fourth Edition] (1991) 474.
20
Skordaki and Walker, supra note 17, at 26. 21 Id. at 29. 22 Id. at 43. 23Id. at 33. 24 Id. at 61.
• All provinces of Canada except Ontario permit such fees,17 some for over 100 years.18 The amount charged is based on the same factors as a noncontingent fee.19
• Scotland permits lawyers to act on a "speculative" basis." If the plaintiff wins, he or she pays the lawyer the normal fee, but pays nothing if he or she loses.20 • In Northern Ireland, "speculative fee arrangements have operated unofficially . . .
for many years."21
• In the Irish Republic, barristers take cases on a "no goal - no fee" basis, in which the barrister receives his or her normal fee unless no recovery is obtained.22 • In New Zealand, both barristers and solicitors may charge on a "speculative
basis."23
25
See Tanase, The Management of Disputes: Automobile Accident Compensation in Japan, 24 L. & SOC. REV. 651, 659 (1990).
26
See Wallach, No Win, No Fee. But Will Justice Be the Loser? THE [LONDON] INDEPENDENT 14 (July 5, 1995).
27
Regarding England see Genn, HARD BARGAINING: OUT OF COURT SETTLEMENT IN PERSONAL INJURY ACTIONS (1987) 109-110; regarding Ontario see Kritzer, Fee Arrangements and Fee Shifting: Lessons from the Experience in Ontario, 47 LAW AND CONT. PROB. 125, 130 (1984).
28
Skordaki and Walker, supra note 17, at 57. 29
Law Society, Maintenance and Champerty: Claims Assessors and Contingency Fees [published memo] 8-9 (1970).
• While few auto accident cases in Japan lead to law suits, in those cases that do go to court, the lawyers (bengoshi) representing the claimant normally charge on a contingency (no win, no fee) basis.25
• Starting in July 1995, English solicitors could charge injury, human rights, and insolvency clients on a "conditional fee" basis in which the client pays nothing if no recovery is obtained, and pays an "uplift" of up to 100% over the normal fee if there is a recovery.26
Furthermore, researchers have found that even where contingency fees are banned, informal contingent arrangements, where the lawyer does not seek payment of fees in unsuccessful actions, occur regularly.27
The percentage principle is not unique to the United States. Greece permits percentage fees much like the American contingent fee, but with a limit of 20 percent of the amount recovered.28 While until 1995 England forbade the contingent fee for personal injury cases, it has long permitted solicitors to charge their commercial clients on a commission basis for work such as debt cases.29 In other countries (e.g., Germany, Belgium, Italy, and Portugal), fees are set, at least in part, as a percentage of the amount in dispute rather than as a percentage of the amount
30
Skordaki and Walker, supra note 17, at 54, 63, 66, 72. 31
Kritzer, supra note 27, at 130-131.
32See Kritzer, The English Rule, 78 ABA J. 54 (1992). 33
The most general exception is the state of Alaska which uses a version of the loser pays rule; see DiPietro, Carns, and Kelley, ALASKA'S ENGLISH RULE: ATTORNEY'S FEE SHIFTING IN CIVIL CASES (1995); Kleinfeld, Alaska: Where the Loser Pays the Winner's Fees, JUDGES' J. 3 (Spring 1985). For a brief period, Florida applied a loser pays rule to medical malpractice cases; see Snyder and Hughes, The English Rule for Allocating Legal Costs: Evidence Confronts Theory, 6 J. LAW, ECON. & ORG. 345 (1990).
34A Scottish lawyer who takes a case on a speculative basis, is liable for the other side's costs if that side wins; see Skordaki and Walker, supra note 17, at 26. About a month after the conditional fee went into effect in England, the Law Society launched an inusrance program to mitigate the disincentives of the loser pays rule. For a premium of £85 clients can be insured against having to pay most of their other costs of the case (e.g., disbursements) as well as the other side's costs should the case be unsuccessful; see Fee Insurance, LAW SOCIETY'S GAZETTE, 3 (August 9, 1995). Within a month, more that 1400 solicitors' firms handling personal injury cases had signed up; see Insurance Scheme Tops 1000, LAW SOCIETY'S GAZETTE, 2 (August 31, 1995).
recovered;30 in these countries the fee is not contingent (i.e., it is payable win or lose). In my research in Ontario, I found some indication that fees in personal injury cases closely tracked a percentage of the recovery, even though this was a result of a supposed calculation that included a variety of factors.31
Thus, what makes the American system unique is neither the percentage principle nor the contingency principle but the combination of these two elements. In fact, while it is not the focus of this discussion, the key element that makes the American system unique is the combination of percentage fees with the American rule with regard to costs. Most countries use some variant of the "loser pays" principle; that is, the loser pays some or all of the winners legal fees, although the operation of this principle may be more complex.32 In the United States, with some specific exceptions,33 the principle is that each side is responsible for the fees of its own lawyers, win or lose. The result is that in the United States, the plaintiff who hires a lawyer on a contingency basis bears little risk, while in most countries a plaintiff who hires a lawyer on a contingency basis must still confront the risk of paying the other side's lawyer if that side wins.34
35MacKinnon, CONTINGENT FEES FOR LEGAL SERVICES, 197-99 (1964). 36
Benson, supra note 9, at 176.
37Schwartz, and Mitchell, An Economic Analysis of the Contingent Fee in Personal-Injury Litigation, 20 STANFORD L. R. 1125 (1970); Clermont and Currivan, Improving on the Contingent Fee, 63 CORNELL L. R. 529 (1978); Johnson, Lawyers' Choice: A Theoretical Appraisal of Litigation Investment Decisions, 15 L. & SOC. R. 567 (1980-81); See, An Alternative to the Contingent Fee, 1984 UTAH L. R. 485 (1984). For analyses of the economics of the contingency fee from the viewpoint of the client, see Danzon, Contingent Fees for Personal Injury Litigation, 14 BELL J. OF ECON. 213 (1983); Rubinfeld and Scotchmer Contingent Fees for Attorneys: An Economic Analysis, 24 RAND J of ECON 343 (1993).
Some of the Things We Know (or Think We Know) About the American Contingent Fee
The popular perception of the American contingent fee is that it makes the lawyer and client partners in the litigation, and that this works to the client's advantage because it is in the lawyer's interest to maximize the recovery in order to maximize the lawyer's fee. Rigorous analyses of the economics of the contingent fee cast doubt on this perception.
The traditional analysis of the contingent fee essentially accepts the presumption that a lawyer will want to maximize the recovery but then asks whether this is necessarily best for the client. In particular, a lawyer might be more interested in maximizing the recovery to maximize the fee than in obtaining a prompt, fair resolution that is in the best interest of the client.35 More generally, the lawyer might become too driven to maximize the recovery because of his or her own interest in that outcome and fail to see weaknesses that might dictate settling in order to achieve the client's best interest.36 Thus, having a stake in the outcome may be inconsistent with the lawyer's professional responsibility to provide expert, dispassionate advice to the client.
Later analyses of the economics of the contingent fee suggest a different set of problems. These analyses generally focus on opportunity cost, and make the argument that lawyers working on a contingency basis will want to control the time devoted to a case to achieve an hourly return on their time consistent with the opportunity cost of that time.37 This creates a problem not unlike that involving a real estate broker for whom any sale is better than no sale, provided that only the
38
Miller, Some Agency Problems in Settlement, 16 J. OF LEG. ST. 189 (1987); Kritzer, LET'S MAKE A DEAL: NEGOTIATION AND SETTLEMENT IN ORDINARY LITIGATION 63-64 (1991).
39
Hunting and Neuwirth, WHO SUES IN NEW YORK CITY? A STUDY OF AUTOMOBILE ACCIDENT CLAIMS 109 (1962) .
40
Rosenthal, LAWYER AND CLIENT: WHO'S IN CHARGE? (1974). 41
Kritzer, Felstiner, Sarat, and Trubek, The Impact of Fee Arrangement on Lawyer Effort, 19 LAW & SOC. R. 251 (1985).
instant transaction is of concern. That is, it may be in the lawyer's interest to settle a case quickly for a low recovery with relatively little effort even if additional effort would yield a substantially higher recovery. The reason for this is that while a higher recovery will lead to a higher fee in absolute terms, the higher absolute fee may be lower on a per hour basis (i.e., on an opportunity cost basis). The result is an "agency problem": the interests of the agent conflict with those of the principal.38
Empirical analyses provide some support for the more recent analyses. Hunting and Neuwirth suggest that lawyers may see contingent fee clients as "only the source of a piece of lucrative 'raw material' to be processed to a settlement,"39 and some lawyers speak of having an "inventory of clients." Rosenthal found evidence that clients who allowed their lawyers (who were handling routine cases on a contingency basis) a more or less free hand achieved less satisfactory outcomes than did those clients who took a more participatory role in the case. Rosenthal attributed this to the conflict of interest between lawyers and clients (i.e., the lawyers wanted to sharply limit the time it took to handle these routine cases).40 In a statistical analysis of cases from federal and state court, my colleagues and I found that, after controlling for other factors that might affect lawyer effort, contingent fee lawyers devoted less time to cases than did hourly fee lawyers, provided that the amount at stake in the case fell below a particular threshold; above that threshold there was either no difference in effort or contingent fee lawyers devoted more time to the matter (the statistical analysis could not determine which was the case).41 These analyses are
42Carlin, LAWYERS ON THEIR OWN 71-79 (1962). 43
Kritzer, THE FIRST THING WE DO, LET'S REPLACE ALL THE LAWYERS: LAWYERS AND NONLAWYERS AS ADVOCATES [manuscript] (1995) .
44
This is not to say that there is no potential for conflict of interest between lawyer and client. For example, the fee is normally based on a percentage back benefits (up to a maximum of $4,000). One might expect a lawyer to want to delay a case to allow the back benefits to build up. However, it is likely that cash flow needs of lawyers work against delays of several months, so I do ot think that this is in fact a frequent occurrence. consistent with Carlin's study of solo practitioners' handling of injury cases that found that the emphasis was typically on "building up the file" to convince the insurance company defendant to make an acceptable offer of settlement rather than on preparing for a time-consuming trial.42
Interestingly, there may be some important exceptions to this argument. As part of a research project I recently completed (a comparison of lawyer and nonlawyer advocates), I looked at lawyers who handle Social Security disability appeals; many of these lawyers work on a contingent fee basis. Most of the analyses of contingent fees presume a setting such as personal injury litigation where negotiated settlement is an option (and usually the norm); as suggested above, lawyers in these settings may opt for a quick, low settlement. This is not an option in Social Security disability cases. Lawyers do not have an incentive to go for a quick compromise result, because no such results generally exist. The only way for the lawyer to be paid is to win the appeal, and the only way to win the appeal is to prepare an adequate case.43 Thus, the conflict of interest identified in earlier work does not seem to exist in Social Security cases.44
Before mentioning other research on the contingent fee, I should note that the opportunity cost analyses of the contingent fee make one key assumption: the lawyer has alternative income producing uses of his or her time (i.e., the opportunity cost is nonzero). For some lawyers this may not be true, and these lawyers may prefer to maximize the absolute return on even a small case. Furthermore, these analyses view cases more or less in isolation (aside from the assumed opportunity cost that must be based on other cases). Lawyers may have concerns that go beyond
45
See Johnson, supra note 37, at 591, 602-607. 46
Kritzer, Fee Arrangements and Negotiation: A Research Note, 21 L. & SOC. R. 341 (1987).
47Kritzer, THE JUSTICE BROKER: LAWYERS AND ORDINARY CIVIL LITIGATION 152-154 (1990); but see Thomason, Are Attorneys Paid What They're Worth? Contingent Fees and the Settlement Process, 20 J. LEG. ST. 187, 221 (1991).
48
Gross and Syverud, Getting to No: A Study of Settlement Negotiations and the Selection of Cases for Trial, 90 MICH. L. R. 319, 350-51 (1991).
49
Carlin, supra note 42, at 72; Ross, SETTLED OUT OF COURT: THE SOCIAL PROCESS OF INSURANCE CLAIMS ADJUSTMENT [revised second edition] 82 (1980).
the individual case such as establishing or maintaining a reputation vis-a-vis opponents, attracting future clients, establishing precedents that will be useful in future cases, etc. All these factors may work against the simple opportunity cost analysis.45
What else do we know about contingent fees? A variety of research studies have produced the following conclusions:
• Lawyers working on a contingent fee are more likely to emphasize monetary outcomes in negotiating settlements.46
• Simple statements about the impact of contingent fees on the outcome of a case from the client's perspective are not possible; that is, fee arrangement interacts with several variables in complex ways so that sometimes clients do better with a contingent fee and sometimes better with an hourly fee.47
• Contingent fee lawyers may, for a variety of reasons, take cases to trial (particularly cases in which the defense has refused to make a settlement offer) that an hourly fee lawyer would not try.48
• Contingent fee lawyers sometime negotiate package settlements of a set of cases with a single insurer.49
50
Kakalik, King, Traynor, Ebener, and Picus. 1988. COSTS AND COMPENSATION PAID IN AVIATION ACCIDENT LITIGATION 44-45 (1988).
• Market forces can create competition in the percentage rate charged in some types of contingent fee cases.50
Perhaps what is most striking about this brief review is not what I have mentioned, but what I have not, all of which are central to the need for, and likely impact of, changes such as those contained in Proposition 202.
• What are the risks (or "contingencies") that lawyers and clients in contingent fee cases must deal with, and how great are those risks?
• What kinds of returns do contingent fee lawyers normally obtain from contingent fee work?
• How does the contingent fee impact on the bringing of cases and claims, and how might the incentives of the fee shape the claims that are brought?
While there is some research on these questions, that research has largely been ignored in the current debate. Furthermore, there has been no effort to tap into existing sources of data or information to shed new light on these questions.
In the core of this paper, I turn to empirical evidence. I will examine each of these questions, review any relevant extant research, and present any additional data I have been able to locate. These sources include
• my own published work;
• reanalyses of data upon which I based my published work;
• analyses of data collected by me but not described in previous publications; • published analyses of other researchers;
51
See Kritzer, supra note 38, at 58-59.
• unpublished data collected by and provided to me by a variety of sources. I make no claims that the materials I use below are ideal for the purposes to which I put them. My goal is simply to use anything and everything I have been able to find to shed as much systematic light as possible on contingent fee practice.
THE CONTINGENCIES IN THE CONTINGENT FEE Identifying the Types of Risks in Contingent Practice
Most discussions of the contingent fee speak of risk as the possibility that the lawyer will receive no fee; that is the traditional idea of the contingency in the American contingency fee is whether or not a client has to pay a fee: "no win, no pay." For both the lawyer and the client, this is in fact only part of the concern; the other part is how much the fee will be. The American contingent fee system, by relying on a percentage of recovery calculation, assuages clients' concerns about both whether he or she will have to pay the lawyer and how much he or she will have to pay. It does this by incorporating the other major contingencies or risks.
While in many cases the contingent fee lawyer can be confident of obtaining some recovery, the size of that recovery may be much less clear. While much of the literature speaks of going rates and what cases are worth, evidence suggests that case worth is very slippery.51 It may be clear that a case involving permanent paralysis is worth much more than one involving a broken ankle, but knowing what each is worth, plus or minus 25% or even 50%, may be extremely difficult. This uncertainty involves at least two components in most jurisdictions: the valuation of the damages and the apportionment of responsibility. Thus, while a lawyer takes a case with little doubt that some fee will result, the lawyer cannot be sure whether that fee might be $5,000 or $20,000.
52See Kritzer, supra note 47, at 115-116. 53
I have not exhausted the list of risks that contingent fee lawyers have to deal with. I can identify at least two more: how long the lawyer will have to wait until any fee is actually received ("delay risk") and whether the lawyer will be able to collect the fee ("collection risk"). While neither of these risks is unique to contingent fee practice (and the latter does not exist for some classes of cases), the nature of these risks differ from the comparable risks facing the hourly fee lawyer who often expects payments to be made as the case progresses and who can discontinue work if payment is not forthcoming.
EHR ' P(R)×D$
#H
Another element of uncertainty concerns the size of the investment the lawyer will make. A lawyer can never be certain how much time and effort a particular case will require because that is largely out of his or her control. It is the actions of the opposing party that largely determines the effort of a lawyer in litigation, although factors such as stakes and case complexity are important as well.52 In effect, at each decision point (whether to take a deposition, file a motion, respond to a brief, etc.), the lawyer must decide whether and how much to invest, and in doing so, the lawyer almost certainly considers the potential return from the case. Each decision to invest additional effort will then influence the defense side which in turn may make investments that require further investment by the plaintiff's side.
In summary, the contingent fee lawyer must deal with the uncertainty of achieving any recovery, the size of that recovery, and the size of the investment needed to obtain that recovery.53 One way of thinking about this set of uncertainties is in terms of a kind of investment return, where the measure of return is "effective hourly rate" (EHR); this in turn is a function of whether any recovery is obtained (P(R) for probability of recovery), the amount of quantum of damages (D$), and the number of hours the lawyer invests in the case (#H):
54A recent comparison of judge and jury trial outcomes in the federal courts found that; the probability of a plaintiff verdict is remarkably similar for the two types of trials; see Clermont and Eisenberg, Trial by Jury or Judge: Transcending Empricism, 77 CORNELL L. R. 1124, 1137 (1992).
55
Peterson, CIVIL JURIES IN THE 1980S: TRENDS IN JURY TRIALS AND VERDICTS IN CALIFORNIA AND COOK COUNTY, ILLINOIS, 17 (1987); Daniels and Martin, CIVIL JURIES AND THE POLITICS OF REFORM 70-81 (1995); Daniels, Tracing the Shadow of the Law: Jury Verdicts in Medical Malpractice Cases, 14 JUS. SYS. J. 4, 13-14 (1990); daniels and Martin, Don't Kill the Messenger 'Till You Read the Message: Products Liability Verdicts in Six California Counties, 1970-1990, 16 JUS. SYS. J. 69, 71 (1993); Gross and Syverud, supra note 48, at 335; Eisenberg, Testing the Selection Effect: A New Theoretical Framework with Empirical Tests, 19 J. LEG. ST. 337, 357 (1990). Contrary to what is probably the popular perception, nonjury trials are very common in civil cases; see Galanter, The Regulatory Function of the Civil Jury, in Litan (ed.), VERDICT: ASSESSING THE CIVIL JURY SYSTEM 63-69 (1993).
56
See Priest and Klein, The Selection of Disputes for Litigation, 13 J. LEG. ST. 1 (1984); but see Gross and Syverud, supra note 48. Some cases may go to trial not because of uncertainty about liability but because of uncertainty about quantum; see Wittman, Is the Selection of Cases for Trial Biased? 14 J. LEG. ST. 185 (1985).
All three elements of the right-hand side involve contingencies (i.e., risk). Even if there is little or no uncertainty about whether there is liability (i.e., P(R) is equal to or approaches 1.0), uncertainty probably remains with regard to damages (D$) and/or lawyer effort (#H).
In the subsections below I discuss each of the three elements of risk. I will refer to these as liability risk, quantum risk, and effort or investment risk.
Liability Risk
Assessing liability risk is not entirely straightforward. The best information on the risk of obtaining a recovery is available only for cases that go to trial, because we can look at the verdicts as an indicator of risk. The studies of verdicts, mostly of jury verdicts,54 show a substantial variation in the likelihood of verdicts favoring plaintiffs.55 Even accepting this variation, it would be hard to argue with the proposition that, overall, cases that go to trial involve substantial risk for the plaintiff and the contingent fee lawyer representing the plaintiff. The problem with using these data is that the cases that go to trial may be those with the greatest liability risk.56 One response to this critique of focusing on the uncertainty of trial outcomes is that if one could predict with
57
See Vidmar, MEDICAL MALPRACTICE AND THE AMERICAN JURY: CONFRONTING MYTHS ABOUT JURY INCOMPETENCE, DEEP POCKETS, AND OUTRAGEOUS DAMAGE AWARDS 49-92 (1995).
58
One possible exception to this might be cases that are filed simply to avoid statute of limitation problems. 59Vidmar, Are Juries Competent to Decide Liability in Tort Cases Involving Scientific/Medical Issues? Some Data from Medical Malpractice, 43 EMORY L. J. 885, 894 (1994).
certainty which cases would and would not go to trial, we could greatly ease the burden on the courts. No one has been very successful in making such predictions,57 which means that the uncertainty of trial must be a real concern for any case that is actually filed.58
Nonetheless, it is important to look beyond the uncertainty of trials to assess liability risk. What data can we find that go beyond trials to give a better sense of the liability risk confronting contingent fee lawyers? There are several such data sets or research studies available.
Liability Risk in Medical Malpractice
The area in which there is the most extensive information on liability risk is medical malpractice. Studies that look at the likelihood of plaintiffs' verdicts in medical malpractice cases show that the risk of success in those cases is very high; that is, plaintiffs are successful in a small proportion of cases that go to trial. Vidmar looked at number of these studies, and found that the median success rate for plaintiffs was 29.2%, with a range from 13.5% to 53%.59 Three studies that report plaintiff success for a variety of types of cases found that the probability of success was almost always lowest in medical malpractice cases. Overall, plaintiffs' success rate is something
60
Gross and Syverud, supra note 48, at 335; Peterson, supra note 55, at 17, 29; Daniels, supra note 55, at 13. For Cook and San Francisco Counties, Peterson finds that the overall success rate in the latest period he looked at, 1980-84, had risen to 64% and 61% respectively; however, for the period 1981-85, Daniels reports figures for those locations of 57.9% and 60.0%. Daniels reports a number of local figures that exceed 70%. Brickman, supra note 5, at 105, relies upon Peterson's analysis of two locations for his claim that the risk of nonrecovery has declined "substantially" in recent years, citing as a specific example Peterson's report that the success in medical malpractice and product liability cases in Cook County had increased from one-fourth in the 1960's to one-third in the 1970's to one-half in the 1980's. In fact, if anything Peterson's tables show the success in product liability in San Francisco was stable, or dropped, from 1960-1984. Furthermore, his data cover only the first half of the 1980s, and it is unclear whether the large jumps of the early 1980's held up, particularly since the success figures reported by Gross and Syverud from California for a period in 1985-86 appear to be substantially lower than those reported by Peterson.
61
The sample involved virtually all malpractice claims closed by the Wisconsin Health Care Liability Insurance Plan (WHCLIP)— a state backed malpractice insurance plant administered by the Wausau Insurance Company— in which the a patient asserted a claim for money (Daniels, Grossman, and Bertrand, 1992: 3, 16-17). The data were drawn from a larger WHCLIP data base that included all closed medical malpractice cases the majority of which (57%) were incident reports "in which no legal claim was filed and in which the patient did not assert a claim for money;" these were cases in which "a file was opened after WHCLIP had been contacted by the insured concerning an incident and potential claim" [emphases added]; see Daniels, Grossman, and Bertrand, Kill All the Lawyers? Repeat Players and Strategic Advantage in Medical Malpractice Claims, American Bar Foundation (ABF) Working Paper #9210, 16-17 (1992).
62
Computed from id, at Table 1b.
in the range of 50-60%;60 in the medical malpractice area, the success rate is typically in the range 30-35%, very close to Vidmar's median.
We can use several closed-claims study of medical malpractice cases— involving both tried and untried cases— to assess the liabillity risk for the vast majority of cases that do not get to trial. One of those studies relied upon data from Wisconsin for the period 1976 to 1988;61 the total sample size was 2,896. The Wisconsin closed claims study shows that the liability risk for all medical malpractice claims in which a patient asserted a claim for money is very similar to the risk for those that went to trial. Represented claimants secure some recovery in 34% of the claims.62
A study of all closed claims in Florida from 1975 through 1986 is generally consistent with the Wisconsin study. That research showed that payments were made in 26% of the cases over
63Computed from Nye, Giffor, Webb, and Dewar, The Causes of the Medical Malpractice Crisis: An Analysis of Claims Data and Insurance Company Finances, 76 GEORGETOWN L. J.1495, 1542, 1551 (1988)
64
Sloan and Hsieh, Variability in Medical Malpractice Payments: Is the Compensation Fair? 24 L. & SOC. R. 997 (1990) .
65
Danzon, MEDICAL MALPRACTICE: THEORY, EVIDENCE, AND PUBLIC POLICY 18-20 (1985). The California study covered 1974, and the national study covered 1975-78.
66
Id., at 32.
the entire period.63 There was substantial year to year variation from a low of 15% to a high of 44%; interestingly, the highest figures were at either ends of the period studied (40% in 1975 and 1985, and 44% in 1986) and the lowest figures were in the middle (15% in 1979 and 16% in 1980). A second overlapping closed claim study from Florida covered the period October 1985 through March 1988. This study shows success rates depending on the stage of resolution: no suit filed, 80% (n=1091); suit filed but no verdict, 43% (n=4759), verdict but no appeal, 22% (n=696); after appeal, 44% (n=66). Aggregating these figures yields an overall success rate of 47%, which is similar to the latest years in the 1975-86 study.64
Lastly, Danzon reports on a closed claims study involving claims closed in the period 1974-76. Danzon's database included over 6,000 closed claims from two separate sources, a study of California claims jointly sponsored by the California Medical Association and the California Hospital Association and a nationwide study of closed claims conducted by the National Association of Insurance Commissioners.65 Danzon found that 43% of the claims were dropped with no payment, 50% were settled out of court with a payment to the claimant, and 7% were litigated to verdict with a success rate of about 25%. Thus, overall, about 52% of the claims were successful in the sense the the claimant obtained some payment.66
Neil Vidmar reports a slightly different type of study of medical malpractice lawsuits in North Carolina. He and his colleagues collected data on every such suit they could locate that was filed in North Carolina during the three year period that ended on June 30, 1987, plus from a sample
67Vidmar, The Unfair Criticism of Medical Malpractice Juries, 76 JUDICATURE 118, 119 (1992). 68
See Trubek, Grossman, Felstiner, Kritzer, and Sarat, CIVIL LITIGATION RESEARCH PROJECT: FINAL REPORT (1983); Trubek, Sarat, Felstiner, Kritzer, and Grossman, The Costs of Ordinary Litigation, 31 UCLA L. R. 72 (1983); Kritzer, supra note 47.
69
The five districts were Eastern Pennsylvania, South Carolina, Eastern Wisconsin, New Mexico, and Central California.
70
Kritzer, supra note 47, at 139.
of North Carolina counties for the 42 month period from July 1987 through December 1990. They found about 1,200 cases. Vidmar reports that settlements were reached in 50% of the cases, 40% were abandoned by the plaintiff with no payment, and 10% went to jury trials; only one-fifth of the jury trials resulted in plaintiffs' verdicts. Thus the overall success rate in medical malpractice law suits in North Carolina was approximately 52%.67
If anything, these various figures probably understate the liability risk from the attorney's perspective because they include only those cases attorneys formally brought to the insurer's attention. There may be many other cases in which the attorney expends significant time on preliminary investigation without ever notifying the insurer. Clearly, in medical malpractice cases, contingent fee attorneys face very substantial risks on the payment dimension.
Liability Risk in Other Types of Cases
Another source of information on the liability risk faced by contingent fee lawyers is the data collected by the Civil Litigation Research Project (CLRP).68 This study looked at samples of federal and state court cases closed during calendar year 1979 in five federal judicial districts around the country.69 Overall, in the CLRP sample, 19% of the contingent fee attorneys received no fee.70 The risk was higher in federal cases (26%) than in state cases (13%). Part of this reflects that the torts and contract cases involve less liability risk to the contingent fee lawyer (17% no fee in both contracts and torts) than do cases involving other types of issues (38% no fee), and
71The possible exception is in tort cases where there are 27 respondents with fee information, 14 of whom received no fee.
72
Social Security disability encompasses a number of different programs. As part of another study I observed Social Security hearings, and talked to lawyers about their work. These conversations provided evidence on the impact of "collection risk" (see supra, note 53). For regular disability insurance (DI) cases the Social Security Administration (SSA) will withhold 25% of the back benefit and pay that directly to the lawyer if there is an acceptable fee agreement between the lawyer and the claimant. For Supplemental Security Income (SSI) benefits, SSA will not withhold and pay directly to the lawyer; the lawyer must collect directly from the client; see Bush, SOCIAL SECURITY DISABILITY PRACTICE §742 (1992). Lawyers indicated a reluctance to take SSI cases because of the difficulty of collecting the fee. In fact, SSI claimants were less likely to have attorneys than were DI claimants.
nontort-noncontract cases represent a larger portion of the federal cases. However, within the tort arena, the liability risk for contingent fee lawyers is greater in federal court (26%) than in state court (12%).
One problem with these published figures is that it might be that all of the "losers" involve unsuccessful trials, and we already know that that cases that go to trial involve substantial risk. Reanalysis of the CLRP data shows that no fee was received in about half of the cases that went to trial (19 out of 40 cases with information on fees). For those cases that did not go trial, the liability risk was much lower, but still not trivial: 17% of the lawyers received no fee. When we control for area of law, the number of observations is insufficient to look at the liability risk at trial.71 For those cases that did not go to trial the liability risk was 13% in torts (n=205), 17% in contracts (n=65), and 35% in nontort/noncontract cases (n=43).
A final, very different, area for which there is some information on liability risk is Social Security disability appeals (although the term "liability" is probably not the best here).72 A person who unsuccessfully applies for disability payments under the Social Security Act may appeal that denial. The first level appeal is for a "redetermination." If that is unsuccessful, the claimant may request a hearing before an administrative law judge from the Social Security Administration's Office of Hearings and Appeals. Under federal law, attorneys representing claimants at these hearings may charge a contingent fee of up to 25% of past-due benefits, with a maximum of
73
Id., at §702). Actually, there is no legal limit on the fee, unless the case goes to federal court (id., at §752), although in some cases the attorney may be eligible for fees under the Equal Access to Justice Act, and these fees are computed on an hourly basis (id., §761 -§768).
7413 SOCIAL SECURITY FORUM at 28 (September/October 1991). If one looks at data for the period 1976 through 1994, which I obtained from the Social Security Administration's Office of Hearings and Appeals, one sees that 1990 was something of an "average" year, with the years before showing lower success rates (dropping into the high 50's for one or two years) and the years since showing slightly higher success rates (in the low 70's); see Kritzer, supra note 43, at 191 [Figure 4.7].
75
This survey, which targeted lawyers from a stratified sample of federal civil cases from around the United States (the number of respondents was 749) focused on Rule 68, and the impact of possible changes to the rule; see Shapard, LIKELY CONSEQUENCES OF AMENDMENTS TO RULE 68, FEDERAL RULES OF CIVIL PROCEDURE (Washington: Federal Judicial Center, 1995). The data were kindly provided to me by John Shapard of the Federal Judicial Center; neither he nor the Center bear any responsibility for my analysis or conclusions.
$4,000.73 Attorneys handling these cases on a contingency basis face substantial liability risk: represented claimants in Social Security appeals secured favorable decisions in only 68.8% of cases in 1990.74 In other words, in 1990 attorneys lost almost one third of the cases in which they appear.
Other Indicators of Perceived Liabilty Risk
One last type of data that we can look regarding liability risk is the perception of attorneys. In 1994, the Federal Judicial Center conducted a survey of attorneys that included the following question regarding a federal court case in which the attorney had been involved:75
When the outcome of a case is a matter of significant uncertainty, the uncertainty may be due mainly to: (1) uncertainty about damages (with liability fairly clear), (2) uncertainty about liability—or at least about liability for some significant component of alleged damages (with the measure of damages relatively clear), or (3) both of these. Pleas select one of the following statement to indicate the nature of the uncertainties in this case:
76
The figures above apply a respondent weighting scheme that I devised to adjust for the fact that the sample was designed to oversample lawyers involved in cases that went to trial. If I use the unweighted data a large proportion indicated that there was uncertainty about liability: 38% indicating that both liability and damages were uncertain, 31% that only liability was at issue, and only 31% of the respondents selected the responses indicating that they believed that liability was fairly clear.
77
While contingent fee lawyers are slightly less likely (55.9%) than hourly fee lawyers (62.4%) to indicate that liability was uncertain, this different is not statistically significant (?2
= 2.30). 78
Again there is little difference between hourly and contingent fee lawyers in their perception of uncertainty about damages: 51% and 57% respectively.
b. liability was fairly clear, but damages were uncertain c. both liabilty and damages were uncertain
d. there was not much uncertainty about either damages or liability
Liability was seriously at issue as far as the majority of the lawyers were concerned;76 only 41% indicated that liability was fairly clear, with 34% indicating that both liability and damages were at issue, 25% that only liability was uncertain.77 Not surprisingly, retrospectively, lawyers were more likely to report uncertainty about liability for cases that went to trial (78%) than for cases that did not go to trial (58%); however, even for the latter group, a majority expressed uncertainty about liability. Area of law made at most a minimal difference in the perceptions of the lawyers.
Quantum Risk
Even if a lawyer felt fairly confident about "winning" a case, he or she may have much less confidence about the amount that will be recovered. For example, 52% of the lawyers responding to the Federal Judicial Center survey discussed above indicated that the amount of damages was uncertain.78 Interestingly, there is no difference in uncertainty regarding damages between those whose cases went to trial and those whose cases did not go to trial: 52% of both groups indicated that there was uncertainty regarding damages. Thus, at least after the fact, the majority of lawyers involved in federal cases indicated that the case entailed significant quantum risk.
79
Computed from Rosenthal, supra note 40, at 202-207.
80Williams, LEGAL NEGOTIATION AND SETTLEMENT 5-6 (1983).
This should not be surprising because estimating damages, and hence for contingent fee lawyers estimating the fee that might be obtained, is a notoriously imprecise art. Two published studies dramatically demonstrate this problem. Over 20 years ago, Douglas Rosenthal looked at the interaction between lawyers and clients in injury cases. He was interested in the impact of client involvement in the amount of compensation the client ultimately obtained. As part of this study, he needed some estimate of the "true" worth of a case. He asked a panel of four experts to place values independently on 59 cases. In 52 of those cases, the ratio of highest to lowest valuation was 2 or more, and for 19 cases, the ratio was 4 or more.79
Gerald Williams reported a second, different type of study that demonstrates this uncertainty. He conducted an experiment in which he gave 20 pairs of lawyers, all of whom practiced in Des Moines, Iowa, the same information about a single case. Each pair of lawyers retired to negotiate a settlement in private. The lawyers then reassembled to announce to the entire group the settlement each pair had arrived at. The low figure was $15,000 and the high figure was $95,000, with the other settlements scattered randomly between the high and the low.80 This study demonstrates the lawyer's quantum risk: if this were an actual case, and the plaintiff's lawyer was to be paid on a one-third contingent basis, the fee for the identical case would have ranged from $5,000 to $31,667. If one assumes that it might have taken 100 hours to prepare the case to the point of settlement discussions, this would mean hourly rates ranging from $50 to $317. I should also note that a several of the pairs were unable to reach a settlement, and if the case had gone to trial the effective hourly rate could have been zero.
Assessing the quantum risk more specifically is difficult because one needs something to compare outcomes to, and the above discussion makes it clear that obtaining an acceptable
81
The organization was previously known as the All-Industry Research Advisory Council (AIRAC). 82
All-Industry Research Advisory Committee [AIRAC]. AUTOMOBILE INJURIES AND THEIR COMPENSATION IN THE UNITED STATES. 39-40 (1979); All-Industry Research Advisory Committee, COMPENSATION FOR AUTOMOBILE INJURIES IN THE UNITED STATES 31-38 (1989); and Insurance Research Council [IRC], AUTO INJURIES: CLAIMING BEHAVIOR AND ITS IMPACT ON INSURANCE COSTS 31-41 (1994).
83Another study that estimated loss was the RAND study of aviation accident litigation; see Kakalik et al., supra note 50; King and Smith, COMPUTING ECONOMIC LOSS IN CASES OF WRONGFUL DEATH (1988); and King and Smith, ECONOMIC LOSS AND COMPENSATION IN AVIATION ACCIDENTS (1988). While one of the reports of that study provide some information on the variability of payments (Kakalik et al., supra note 50, at 24, 25, 31, 36), the reports do not include controls for estimated loss.
84
See, in addition to the IRC volumes Hammitt, AUTOMOBILE ACCIDENT COMPENSATION: PAYMENTS BY AUTO INSURERS (1985); Carroll, Kakalik, Pace, and Adams, NO-FAULT APPROACHES TO COMPENSATING PEOPLE INJURED IN AUTOMOBILE ACCIDENTS (1991). Hammitt does show a figure for all cases of the distribution of payments for general damages (pain and suffering) controlling for medical loss (at 33). The figure shows the median and the first and third quartiles, and the variability this indicates is quite dramatic.
85
The IRC data are available for reanalysis but the charge for the data has been beyond the resourses I have available.
86
Rosenthal, supra note 40, at 204-205.
baseline is extremely difficult. The Insurance Research Council (IRC)81 has conducted three nationwide studies of automobile accident compensation in which it computed a measure that the researchers referred to as "economic loss."82 This figure included medical expenses, income loss, and other reasonably clearcut components of "special damages." The AIRAC studies included cases where an attorney represented the claimant. In principle these data might be used to assess quantum risk.83 However, none of the published analyses of these data report information on variability of payments controlling for loss in those cases involving attorneys.84 That is, our best indicator of quantum risk is a measure of variability, which unfortunately reports of the IRC do not show.85
One source that does provide an ability to look at variation in recovery relative to stakes is Rosenthal's data. In addition to the outside expert judgments, Rosenthal obtained information on the actual recovery.86 I computed the ratio of recovery to the mean valuation of each case, and
87In this study, stakes was defined as the lawyer's assessment of what a reasonable settlement would have been. The survey asked the lawyer for this assessment at three different points during the litigation; I have used the maximum value reported by the lawyer.
88
If one were to assume a normal distribution, 68% would fall in a range equal to twice the standard deviation, centered around the mean; in this case, 80% of the cases fall in that range (37 to 130).
multiplied that ratio by 100; the result is the percentage of the case value recovered. The median was 76. More important as an indicator of risk are measures of variation. The midspread— the range from the 25th percentile (the first quartile) to the 75th percentile (the third quartile)— is 57 to 111 (the standard deviation is 52). This is a substantial amount of uncertainty.
The only other data that I have been able to locate that allows some measurement of of quantum risk is the Civil Litigation Research Project data. That data contains information on both the lawyer's assessment of stakes87 and the amount of recovery (from which the fee is computed). Taking only those lawyer respondents who worked on a contingency basis and who obtained some recovery, I again computed the ratio of recovery to stakes, multiplying the result by 100 to obtain a percentage figure. The median value for this ratio was 80 (i.e., in the median case where some recovery was obtained, the recovery was 80% of the stakes). The midspread is 50 to 100 and the standard deviation is 41.88 These figures are strikingly similar to those from the Rosenthal data.
One advantage of the CLRP data is that we can focus in on identifiable subsets of cases. Doing so does reduce the undertainty somewhat, but quite a bit remains. The best way to see this uncertainty is to use the graphic device of a box and whisker plot. A box and whisker plot is a rectangle (or "box"), the ends of which represent the first and third quartile; a line is drawn inside the rectangle to show the location of the median. The "whiskers" are lines coming off the ends of the box that box that stop at either the smallest/largest case or at a point equal to 1½ times the
89
There is one case, with a value of 300, which I have not shown in order to avoid distorting the Figure. This is a state, tort case in the small stakes category.
width of the box; observations beyond the end of the whisker are considered outliers, and are shown as individual dots.89
The first entry in Figure 1 is for all cases, and shows the information mentioned above: the box goes from 50 to 100 (showing the midspread) and the median line is at 80. The risk in federal cases appears larger and that in state cases smaller. The risk in tort and contract
FIGURE 1: QUANTUM RISK ESTIMATES
cases is roughly similar, with substantially more risk in noncontract, nontort cases. Risk is lower in small cases (under $10,000 at stake); for larger cases, the amount of risk is about the same for cases over and under $50,000, but positioning of risk is much lower for larger cases (over $50,000) with a median ratio at 40 (compared to somewhere between 75 to 86 for every other subset) and a third quartile at 75 (compared to 100 for all other subsets).
These data show clearly that lawyers face quantum risk, even when they think they know what a case is worth. Conceivably, if lawyers were better able to estimate the stakes or payout from a case the risk would be reduced. However, the American civil justice system is such that damages are inherently uncertain. One might be able to make distinctions in terms of orders of magnitude, but from the viewpoint of the contingent fee lawyer, this will leave very substantial amounts of risk with regard to quantum.
90
See Kritzer, Sarat, Trubek, Bumiller, and McNichol, Understanding the Costs of Litigation: The Case of the Hourly-Fee Lawyer, 1984 AM. B. FOUND. RES. J. 559, 568-570, 579 (1984).
91
Pratt, What Is the Airfare form Denver to Chicago? Well, It Depends . ., 77 JUDICATURE 189 (1994).
Effort Risk
The other component of risk is the denominator (#H) of the effective hourly rate (EHR) equation, the amount of time the lawyer will have to invest in a case. Some things lawyers know in advance: if the case goes to trial it will take a lot more time than if it is settled; medical malpractice and product liability cases are likely to take much more time than are more routine auto accident cases; a "bet-your-corporation" case will take more time than a routine employment discrimination case. However, beyond these simplistic categories, estimating the effort required to handle litigation with any degree of uncertainty is impossible because of the inherently interactive quality of litigation.90
The nature of the uncertainty was amusingly illustrated in a recent piece which speculated on what would happen if airline fares changed to a rate of $3 per minute from time of check in until the time baggage is claimed, plus extras for things such as using computerized flight routing and the like.91 That is, one would not know what the flight would cost until it was over because the airline wouldn't know what exactly how the flight would go. While this piece was meant to illustrate the silliness of charging by the hour, it actually highlighted the problem of uncertainty. With regard to legal services, uncertainty is greatest in litigation because one side must respond to what the other side does, and there is no way of knowing with any certainty in advance what exactly the other side will do.
We can get some sense of the effort risk again using the Civil Litigation Research Project data. The range of hours that contingent fee lawyers spend on cases is very wide. Overall, in the CLRP data set, it ranges from essentially zero (presumably meaning that all of
92
Note that I have limited the maximum value shown in Figure 2 to 1,100, even though there are two cases that exceed this value, both over 2,000.
FIGURE 2: EFFORT RISK
the work was done by a paralegal or some other nonlawyer support person) to 2,300 hours. The median number of hours is 35 for contingent fee lawyers, and the midspread is 15 to 80. Of course, without introducing some controls, these figures do not tell us a lot.
Figure 2 shows box and whisker plots for the same subset of case categories used in my discussion of quantum risk. Here the variability is much greater, particularly as shown by the outliers (indicated as "o"s in the figure) and extreme cases (indicated as "*").92 For some categories most cases fall within a fairly narrow range; this is clearer in Figure 3 which eliminates from the figure those cases requiring more than 500 hours. For example, the
93
The latter is the lawyer's response to the following question: "On a scale of 1-5, if one is simple and five is very complex,how would you rate this case as to its complexity of fact and law?"
FIGURE 3: EFFORT RISK (compressed)
midspread for cases involving less than $10,000 is only 9 to 30); however, even here, the number of hours can be very large (the maximum is 1,000 in this category).
Figures 4 and 5 look at the lawyer effort split in two additional ways: whether or not there was a trial, and the lawyer's subjective assessment of the case's complexity.93 These figures show some difference in the effort risk depending upon whether the case goes to trial, but the lawyer will not know whether the case goes to trial when he or she accepts it. Furthermore, there is clearly substantial effort risk for both situations, particularly as shown by the many outliers in the subset that did not go to trial. Of more interest is the clear variation in level of risk depending upon case complexity (keep in mind that the lawyer is rating
94
The data from this survey were made available to me by John Shapard of the Federal Judicial Center; neither he nor the Center bear any responsibility for the analysis reported here.
FIGURE 4: EFFORT RISK BY TRIAL AND COMPLEXITY
the complexity after the fact; the degree of complexity may not have been clear at the beginning of the case). Even so, within the least complex case, there is substantial variation (risk) in the hours the case required; the midspread is 6 to 30, and 10% of the cases required 60 hours or more (the maximum is 350 hours).
There is one last source of data that provides evidence on effort risk, and this is a second survey conducted by the Federal Judicial Center between 1990 and 1993.94 In this survey, lawyers estimated the amount of time they spent on a case randomly sampled by the FJC staff. In addition, the respondents were asked to provide an estimate of stakes in terms
95The also provided a figure for the "worst likely outcome"; I use only the "best" figure in my analysis.
FIGURE 5: EFFORT RISK BY TRIAL AND COMPLEXITY (compressed)
of "the dollar value of the best likely outcome."95 This information was available for 205 lawyers who had been retained on a contingency fee basis. The number of hours reported by these lawyers ranged from 2 to 2,000. The median was 75, and the midspread went from 30 to 125. Figure 6 shows the variation in effort by level of stakes as measured in this survey; not surprisingly, the effort risk increases as the stakes went up, although there is substantial risk at all levels (the midspread for the lowest level shown in the figure was 20 to 90 compared with 80 to 500 for the highest level).
FIGURE 6: EFFORT RISK BY STAKES
In contrast, as shown in Figure 7, there is little variation in effort risk by area of law in this data set. Figure 8 splits the risk out by the stage of disposition:
• before the issue was joined;
• after joinder but before any court action; • after court action but before pretrial; • after pretrial but before trial; or • during or after trial.
Interestingly, the size of the midspread is similar for all stages of disposition except trial; what does differ is that for the "after court action" and "after pretrial" subsets, outliers become more frequent. Taken together, these two data sets demonstrate the substantial effort risk that contingent fee lawyers face. Introducing controls for things such as complexity helps specify the level of risk, but that does little to eliminate the risk. The "time contingency" may in fact be the largest uncertainty in the contingent fee calculation. Interestingly, it is also the contingency that may be most controllable, not by the contingent fee lawyer but by the opposing side.
FIGURE 8: EFFORT RISK BY TIME OF DISPOSITION
Risk in Contingent Fee Practice
The discussion makes clear that contingent fee lawyers face substantial risk. There may be cases in which the risk is small on one or two of the dimensions; it may be much less likely that the risk is low on all dimensions. For example, a lawyer in a simple auto accident case may be quite certain of obtaining some payment; that is, the liability risk may be very low. However, the lawyer may have substantial uncertainty about how the opposing side would approach the case or about the amount that might ultimately be recovered. In contrast, in a Social Security disability case, the lawyer can know with some certainty what the likely fee will be if the appeal succeeds, but may be less certain about the likelihood of success or about how much time it will take to
96
One could also critique fees earned for being out of line with the results achieved. For two examples, see Meier, Math of a Class-Action Suit: 'Winning' $2.19 Costs $91.33, NEW YORK TIMES 1 (November 21, 1995); or $1 Verdict Nets $2M in Fees, NAT. L.J. A8 (November 20, 1995).
97
"Rethinking Contingency Fees," supra note 3, 3, at 24.
prepare the case (although the uncertainty about the time required will be much less than for a lawyer in a personal injury case).
Clearly, simplistic statements, such as "how can a lawyer charge a contingent fee in an airline accident case when the lawyer knows that there is no contingency because someone will pay damages," misses the full meaning of the contingency. In other words, it is misleading to think of the American contingent fee simply in terms of "no win, no pay." Moreover, while the level of one type of risk might decrease (e.g., the probability of recovery might go up in a particular type of case over time), that might well be accompanied by increases in other types of risk (the uncertainty about the amount of effort a case will require could well be greater as the sophistication of the defense side increases).
RETURN ON INVESTMENT: THE PROFITS OF CONTINGENT FEE PRACTICE
Probably the most controversial aspect of contingent fee practice is the claim by critics and reformers that lawyers earn fees that are out of line with the amount of work performed.96 One of the leading critics who takes this position is Professor Lester Brickman. In a variety of arenas— academic journals, congressional testimony, and policy proposals— Brickman has advanced the argument that "[m]any cases exist in which liability is not contested, where the effective hourly rates of compensation obtained by contingency fee lawyers range from $1,000 to $5,000 to $10,000 to as high as $25,000 - $30,000 per hour."97 While I do not question that
98
One need only refer to Joe Jamail in Pennzoil v. Texaco who is reputed to have received a fee of around $420 million; see Brimelow and Spencer, supra note 7, at 204. The NATIONAL LAW JOURNAL (September 13, 1993) at 15, reported a case in which a judge approved a fee of 1/6 of a recovery worth about $50 million that worked out to about $4,000 per hour. The judge concluded that the attorney should not be "penalized for achieving an easy victory"— one that gave the plaintiffs represented by the lawyer more than a full recovery of their losses, even after deducting the lawyer's fee.
99
See Brickman, supra note 5, at 132-34. I critique Brickman's criticism of prior studies in Appendix 1 of this paper.
there are cases in which lawyers earn extremely high hourly fees,98 the thrust of Brickman's writing is that such fees are common rather than exceptional. Brickman develops this argument by challenging data that seems to show that typical contingent fees do differ greatly from typical hourly fees.99 Is Brickman correct? Do contingent fee lawyers obtain compensation that is considerably better than that obtained by lawyers who work on an hourly basis? As it turns out, there is a very wide variety of evidence that we can examine to look at the economic returns from contingent fee work.
Extant Effective Hourly Rate Studies
Brickman himself mentions two studies that estimated the return on the time investment of contingent fee lawyers. Both studies focused on the "effective hourly rate:" the fee received divided by the hours worked.
