Want to earn big
fat fees for little to no work or risk -- doing so in violation of governing
rules and laws? If you're an attorney in a personal injury case you're
used to such an arrangement, even though your fees are legally required to
meet a fiduciary "reasonable fee" standard, not the anything-but-fraud
norm of ordinary commercial transactions. Typically, tort lawyers charge
at least a third of any award -- now 40% in a growing number of states --
even if the case is settled before significant case time has been clocked
and even if the defendants' liability has been clear from the get-go.
Former Harvard President, Law School Dean, and now-Professor Derek Bok sums
up the problem well:
is little bargaining over the terms of the contingent fee. Most plaintiffs
do not know whether they have a strong case, and rare is the lawyer who will
inform them (and agree to a lower percentage of the take) when they happen
to have an extremely high probability of winning. In most instances, therefore,
the contingent fee is a standard rate that seldom varies with the size of
the likely settlement or the odds of prevailing in court.
observation is confirmed by empirical evidence from a forthcoming study by
the Insurance Research Council titled "Paying for Auto Injuries," which finds
that no matter whether time of settlement is one day or one year, whether
the amount of settlement is $100 or $25,000, or whether your insurance company
or that of the opposing party pays the claim, median attorney contingent
fees remain constant at 33%.
To curb these abuses, petitions have recently been filed with 12 state Supreme
Courts (with others in the works) to revise rules of professional conduct
in order to prevent such overcharges and to ensure the enforcement of existing
fiduciary standards. While the petitions have attracted limited public
interest and have been denied in two states, their substance is of cosmic
significance to today's tort system.
Ironically, the most revealing evidence of the need to reign in contingent
fees abuse has come from the tort bar's opposition to this proposal. In Utah
-- the first state to conduct hearings on the rule change -- the principal
defense of the status quo took the forms of allegations by attorneys that
they "voluntarily reduce[d]" their fees when they regarded them as excessive.
Even assuming attorneys occasionally voluntarily reduce their fees, the Utah
"defense" is powerfully self-damning. Attorneys should be the last parties
to exercise unfettered discretion in determining whether they have violated
legally binding fiduciary norms. Lawyers routinely condemn such blatant conflict
of interest practices when judging the practices of trustees and other fiduciaries,
and it passes belief that they should be exempt from the independent fee
review requirements they conduct and enforce against other fiduciaries.
Under the proposed reform, plaintiffs' lawyers are required to advise defendants
of the basic, discoverable facts of their claims, and may not charge more
than ten percent of the first $100,000 of case settlements and five percent
of additional sums if their clients accept early, rapid defendant settlements
offers. Because some cases that settle early may require more work
than others, plaintiffs' lawyers may always petition the courts to increase
their fees beyond the limits of the rule. Critically, the proposal
neither requires defendants to make offers nor plaintiffs to accept them.
Even more critically, and in order to protect plaintiffs' lawyers from defendant
low-ball settlement offers, the proposal's fee restrictions rule only take
effect when defendant offers are accepted following full consultation between
plaintiffs and their lawyers. The proposal offers a simple incentive
to defendants: make a settlement offer that nets claimants what they
would receive under the current system, or even more, and save lots of money.
Fail to do so, and play under current rules requiring you to pay absurdly
high transaction costs in routine cases. This reality was well captured by
a recent Joint Economic Committee finding that legal fees in automobile cases
-- where more than 99% of claims are settled without trial and where almost
all cases involve routine processing -- exceed $16.7 billion per year.
Sorely pressed victims of highly regressive and rapidly rising auto insurance
premiums should hardly have to finance a fee system that exceeds the gross
national product of half of the countries in the United Nations.
The proposed reform, applicable to personal injury cases, involves nothing
new. In condemnation cases, lawyers typically charge a contingent fee
only against the difference between the state's initial offer and any higher
sum paid after the lawyer is retained. Other examples exist, in areas
ranging from workers compensation to securities class actions, where contingency
fees can only be charged on the so-called added value basis.
Some critics charge that the proposed rule will create situations in which
"everyone but the lawyers would be better off." Just so: the reform is designed
to benefit injured parties and American consumers, and to the tune of billions.
That the defense and plaintiffs bars are equally opposed to the proposal
is revealing. Under the current system's perverse incentives, defendants
frequently use their lawyers for endless depositions and other forms of Dickensian
obstructionism in order to cause plaintiffs' lawyers to do the following
math: settle for peanuts and make a high hourly fee or go for top dollar
and receive modest compensation for your time even if you're successful.
The proposal makes these defendant gaming incentives counterproductive. Actuarial
and management consulting firm Tillinghast-Towers Perrin estimates in their
just released U.S. Tort Costs: 2003 Update, that 54% of all tort awards
go to transaction costs (including fees paid to both the plaintiffs and defense
attorneys and associated costs to administer awards). The new rule closes
this gap for parties settling early, with injured parties receiving significantly
higher shares of dollars previously used to pay plaintiffs' and defendants'
The Association of Trial Lawyers of America (ATLA) -- the trade group of
the tort bar -- agrees 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." If ATLA and its members are sincere
in this conviction, then it's time for them to join legal heavyweights Derek
Bok, Harvard's Mary Ann Glendon, and Cornell's Roger Cramton, among others,
who recently commended the reform proposal:
leave to the courts to determine the modifications, if any, necessary to
tailor the petitioners' proposal to the needs of their states. At the same
time, we strongly believe that the time has come for the courts to put ethics
rules in place that foster the early settlement of legal disputes and close
the gap between the bar's professed ethical norms and its real-world practices.
mustn't be done is nothing. Reform is necessary to drastically reduce
the tort system's bloated transaction costs and restore the fundamental trust
that should be at the heart of attorney-client relationships.
O'Connell is the Samuel H. McCoy II Professor of Law at the University of
Virginia. Brent Tantillo is Deputy Director of the Project for Civil Justice
Reform at Hudson Institute.
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