Journal of the Institute for the Study of Legal Ethics

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In contemporary times, the two main methods that lawyers use to bill clients are, first, the contingency fee (used primarily by plaintiffs' attorneys in personal injury actions), and, second, billable hours (used by both plaintiffs' and defendants' attorneys in all other cases, ranging from corporate advice to litigation). In recent years, both types of fees have come under heavy criticism.

Opponents of contingency fees typically claim that the plaintiffs' lawyers are often "over-compensated." Contingency fee lawyers dispute that. Because the lawyer only receives remuneration if the client agrees to a contingency fee and if the case is successful, proponents of contingency fees argue that the fees cannot be "too high." Clients only accept the fees if they choose to do so, and the lawyers have the risk of earning nothing.

However, in some cases involving class actions, attorneys have received very handsome fees while their clients have walked away with little. For example, in one case, the attorneys for the class action plaintiffs agreed to accept $28 million in fees while their clients would receive $14 each.

In addition, given the greater frequency with which juries mete out punitive damages in recent years, in some cases, contingency fee lawyers are compensated in a way that, if the figure were converted to an hourly rate, amounts to many thousands of dollars per hour.5 While it is true that the number of cases in which juries award major punitive damages are still rare (as a percentage of all cases seeking punitive damages), a personal injury lawyer with a diversified portfolio of cases is very likely to generate a handsome yearly income. For an individual defendant, the award of punitive damages may be like getting hit by lightning: it hardly ever happens to any one person in particular, but it does eventually happen to someone.

While no particular plaintiff can be assured of winning a punitive judgment, the lawyer representing a series of plaintiffs is much more likely to win a punitive award in one of the cases. Consider, for example, the women who sued McDonald's because she spilled a hot cup of coffee on herself. She won a punitive award (a settlement followed the jury verdict), but earlier plaintiffs complaining of similar injuries were not so fortunate. Each lawsuit may be likened to a lottery ticket. The more tickets you have, the better chance of holding a winning ticket. The personal injury plaintiff has one ticket; the lawyer representing a multitude of plaintiffs has a lot of tickets. The individual plaintiffs risk of losing is real; the lawyer's risk of losing a diversified portfolio of cases is much less.

Another objection to contingency fees is that the fee structure encourages lawyers to take frivolous cases. The latter argument does appear, at first blush, to be counter-intuitive because truly frivolous cases are losers. One would think that the last type of case a lawyer would take on a contingency fee would be a frivolous case. Because contingency fees only offer pay to the lawyer if he or she wins, the contingency fee lawyer should function as a gate-keeper. A lawyer should not want to bring a case if it is frivolous. If the case is a likely to be a loser, the lawyer (who only is paid if the case is successful) should be unwilling to take the case: one-third of nothing is not very much.

On the other hand, contingency fees may encourage litigation of weak (but nonfrivolous) cases involving sympathetic plaintiffs. The lawyer who takes on a portfolio of cases may be quite willing to take an individual case that is not likely to win if he or she thinks that the likelihood of all the cases being lost is small (given the fact that each severely injured plaintiff cuts a sympathetic figure when before a jury).

A third major objection is that a contingent fee case places the lawyer in a conflict of interest position, with respect to the client. The lawyer may be willing to settle the case very quickly before much work has been done, but it may not be in the best interest of the client to settle before discovery. On the other hand, as the case approaches trial, the lawyer may be more interested in not settling because it is only by playing in the litigation lottery (i.e., going to the jury) that the lawyer can hope to eventually hit the jackpot.

Because of these issues, commentators have offered various proposals to modify the contingency fee arrangement and reduce litigation. One would expect that contingency fee lawyers would not greet such proposals with a warm welcome because the proposals should translate into a reduction of their income. In fact, that is what has happened.



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