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Bringing the Rule of Law to Lawyers
by Jeffrey O'Connell & Brent Tantillo
1 March 2004The Law

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.


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:

There 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.

Bok's 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' attorneys.

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:

[W]e 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.

What 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.

Jeffrey 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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