« Discipline Corner | Main | Appendix I for Proposed Contingent Fee Restrictions »

Contingency Fees: Should They Be Limited in Personal Injury Cases That Settle Early?

Author; Steven T. Densley

Lawyers in the United States are increasingly subject to criticism for the perception that they are more interested in money than in honoring long standing ethical principles that govern the profession. When lawyers receive compensation that is grossly disproportionate to work done, amounting in some cases to more than ten thousand dollars per hour,1 this perception is hardly unfair. And the problem is not limited to mass tort cases or class actions. Personal injury attorneys retained in run-of-the-mill automobile claims, for example, can charge a full third or more of any award even when cases they bring settle before the attorney is required to do much work.

Unlike many other professions, the practice of law is governed by ethical principles governing reasonable compensation. But lawyers increasingly breach these ethical standards, undermining the public's confidence in and respect for our profession. This is why the national legal reform organization Common Good2 has asked the Utah Supreme Court to revise Rule 1.5 of the Utah Rules of Professional Conduct.

The proposed change would encourage early settlement by reducing attorney fees in personal injury cases to a reasonable level when early settlement occurs. The revised rule would reduce the burden on courts, pass significant savings on to the public and would ensure that more money is paid more quickly to accident victims - who are supposed to be the beneficiaries of our tort system, after all.

Background
Currently, Rule 1.5 requires that "a lawyer shall not enter into an agreement for, charge or collect an illegal or clearly excessive fee." The rule also provides factors to be considered in determining reasonableness: the amount of time and labor required; whether the questions involved are difficult or novel; and the level of skill needed, among others.

Courts, ethics committees and legal commentators agree that the risk of non-recovery is the only justification for the percentage contingency fee.3 A contingent fee is a risk-sharing joint venture in which an attorney adds his time, effort, and talent to the client's claim. Its distinguishing characteristic is risk: if there is no recovery, then the attorney gets no fee. Where there is real risk of non-recovery and therefore non-payment, it is appropriate for the rate of payment under a contingency fee to exceed the hourly rate for lawyers of similar qualifications. Where there is little risk of non-recovery, however, a contingent fee should be correspondingly low. In sum, determining the reasonableness of a contingent fee is directly related to the risk and difficulty associated with that particular case. In fact, in the case of In re Discipline of Babilis, 951 P.2d 207, 210-11 (Utah 1997), the Utah Supreme Court upheld a disciplinary court's decision that charging a contingency fee for an uncontested probate matter "was excessive because there was little or no risk that [the] client would not recover."

A Utah Bar Ethics Advisory Opinion supports the principle that risk of non-recovery is the foundation for the contingent fee. That opinion reads: "Implicit in the concept of the contingent fee is the notion that there is an actual contingency upon which the attorney's chances of being compensated are based. In other words, there must be a realistic risk of nonrecovery."4

The Proposal
Despite the requirement that attorneys charge "reasonable" fees, tort attorneys are able to enter into fee agreements under which they take one-third or more of the recovery as a fee even if the attorney knows the case is low-risk, or even if the case settles before the attorney does much work. Even opponents of the proposal agree that while "[i]t is widely accepted that contingency fees should vary depending on the riskiness and complexity of the individual case," this rule is "almost universally honored in the breach."5 The proposal seeks to eliminate this practice by making express in Rule 1.5 of the Utah Rules of Professional Conduct that this sort of practice is not reasonable.

Under the proposed rule, when an injured person retains an attorney on a contingent fee basis, the attorney must provide written notice sufficient to allow the allegedly liable party to assess the claim. If a defendant makes a settlement offer within 60 days of the required notice (which must be kept open for a period of at least 30 days), and the injured person accepts that offer, the attorney may charge only an hourly fee that does not exceed 10% of the first $100,000 plus 5% of any amount above $100,000. If the attorney does not provide that notice, the attorney may charge only an hourly fee that does not exceed the limits described above, regardless of how the case concludes. Because some cases may require more work than others, counsel may always petition a court to increase the permissible fee beyond the limits in the rule.
The proposal does not require a party to make or accept an early offer, and the proposal will have no impact if no offer is made or accepted. In such cases, the arrangement between injured parties and their counsel will be governed by the fee agreement in place, subject to Rule 1.5's requirement of reasonableness.

Rationale
If lawyers were already setting contingent fees based on the reasonableness factors in Rule 1.5(a), one would expect to find contingent fees charged along a continuum, reflecting the variations in those factors. However, as former Harvard University President, Law School Dean, and now-Professor Derek Bok has noted,

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.6

Professor Bok's observation is confirmed by the empirical evidence: A forthcoming study has found that median contingent fees remain at 33% despite variation in the following variables. 1) time of settlement; 2) amount of settlement; and 3) whether one's own insurance company or the opposing party's insurance company pays the claim.7 Most significantly, the fee in cases that settle in less than 3 months is 33%.8

According to another study, less than 1% of lawyer advertisements placed in the Yellow Pages engage in any form of price competition.9 Instead, there is a presumption that the percentage rate of a contingency fee is "usually in the amount of one-third."10 Remarkably, and contrary to the basic relationship between prices and supply, as the number of lawyers has more than doubled, contingency rates have failed to decrease.11 In fact, a recent study has found that, when adjusted for inflation, the effective hourly rate of contingency fee lawyers has increased 1000%.12

In effect, the proposed rule creates the continuum that Professor Bok posits: the rule separates out those claims that can and do settle early, and limits fees only in those cases. In cases that don't settle early, the rule's limits simply do not apply.

Where there is a real dispute between the parties as to liability or damages such that the parties cannot resolve their dispute early, the amended Rule 1.5 would have no effect. Rather than merely being toll-takers charging for access to the Courts, attorneys under these circumstances add real value to their client's claims. The proposed rule thus effectuates the very essence of a fiduciary's duty and the obligations of the current Rule 1.5.

Rule 1.5(a)(4) requires consideration of the "results obtained" in evaluating the reasonableness of a fee. However, as In re Discipline of Babilis revealed, "results obtained" cannot be read merely as the final amount recovered, but must include the value an attorney adds to the claim. For example, if a plaintiff is the sole beneficiary of a $100 million life insurance policy, but must hire an attorney to assist in the filling out of paperwork; it would be excessive for the attorney to receive $33 million despite the fact that his efforts were no more arduous than had the policy been for $100,000.

Injured parties are simply not being protected from paying more than the value added by their lawyers. In fact, studies have shown that unrepresented claimants sometimes receive higher net recoveries in personal injury cases than claimants represented by counsel. A nationwide survey of 38,444 automobile claims paid during a two-week period in 1997 compared the payments to claimants who were not represented by counsel to payments of those represented by counsel. The survey revealed that in automobile injury cases, "[bodily injury] claimants represented by attorneys received, on average, a net payment that was $741 lower than that received by those who had no attorney" after deducting economic losses and attorney fees.13

It is not difficult to see how the proposed rule can encourage settlements and save money for both plaintiffs and defendants. Imagine, for example, a personal injury action in which the plaintiff would be willing to settle for a net $80,000 award, but the defendant is unwilling to pay any more than $110,000 to settle the case. Without the proposed rule, the defendant could reasonably presume that the plaintiff has roughly a one-third contingent fee agreement with her lawyer. The potentially responsible party should not bother to make a settlement offer because his maximum settlement price ($110,000) would not be attractive to plaintiff after her attorney takes a third ($36,666) of the settlement. In order to settle the case, in fact, the potentially responsible party would have to offer $120,000.

The proposed rule, however, creates a window of opportunity in the first 60 days of a claim within which the defendant could make an offer of $100,000 which would be gladly accepted. The plaintiff would get more than he or she was willing to accept and the defendant would pay less than he or she was willing to pay, all without going to trial. The attorney, who investigated the claim and wrote a notice of injury - but did not have to prepare for trial or even file a complaint - would receive a reasonable hourly fee up to $10,000. The rule, then, would ensure a better result for both plaintiff and defendant, and would take another case off the dockets of our already-burdened courts.

The proposed rule for personal injury cases, which aims to reduce fees that go beyond the value added to a plaintiff's claim, is nothing new. In eminent domain litigation, for example, lawyers typically charge a contingency fee only against the difference between the State's initial offer and any higher sum paid after the lawyer is retained.14 Experience has taught that the large majority of securities class action matters have "no inherent risk."15 And yet rather than continue to enable attorneys to charge contingent fees for these cases, courts have conducted independent assessments of the risk in particular cases and reduced the attorney's fee accordingly.16 A contingent fee is an inappropriate method of payment when a life insurance policy claim has already been presented to the insurance company, and a settlement offer made.17 Oregon limits attorney fees in workers' compensation cases to no more than 25% of the difference between the amount approved by the initial offer and the benefits later approved at hearing or by stipulation.18 Finally, where a lawyer assists in defending against a government claim for increased taxes, the lawyer takes his contingent fee based upon a percentage of the amount he saves the client.19

All of these types of litigation - eminent domain, securities class action, life insurance, workman's compensation, and tax certiorari - have one significant factor in common: there is no substantial risk of non-recovery. However, personal injury litigation is a category of cases where the fiduciary ethical norms of Rule 1.5 have not been routinely enforced.

Those opposed to modifying Rule 1.5 do so principally on the defense that contingent fees are an important means of providing legal services to those who would otherwise be unable to afford them. But the undisputed fact that contingent fees play an important role in our legal system says nothing about the reasonableness of 1/3 contingent fees in low-risk, low-effort cases. The proposed rule preserves contingent fees as a means of extending legal services to plaintiffs who could not otherwise afford them, but limits such fees to a reasonable amount in cases that settle quickly.

The proposed rule will not "diminish plaintiffs' access to justice,"20 or otherwise deprive injured persons from hiring contingent fee lawyers. Rather, in the only instances in which the rule limits contingent fees, the fee paid to the lawyer is still contingent on a successful result - that is, on a settlement that is acceptable to the claimant. The only difference is that the fee - though still contingent on success - must be reasonable when measured against the number of hours that have been spent on the case.

It has also been argued that the proposed rule will create situations where "everyone but the lawyers would be better off."21 Certainly, the proposed rule would make parties to personal injury litigation as well as Utah consumers better off. Indeed, a committee of the United States Congress has estimated that the proposal would save Utah consumers in excess of $20 million per year on legal fees.22 But these results are not at the expense of lawyers' reasonable expectations. Although Plaintiffs' counsel will be unable to collect large fees in cases that settle early, a reasonable hourly fee will still be paid. Moreover, although fewer billable hours will be available to defense attorneys because there will be fewer cases to defend, and fewer protracted cases, the proposal will not affect the amount of a reasonable hourly fee. While it is true that the gains to injured parties and the public are derived from lower attorney's fees, as the Rules of Professional Conduct state: "The profession has a responsibility to assure that its regulations are conceived in the public interest and not in furtherance of parochial or self-interested concerns of the Bar."23

Conclusion
The Utah State Bar has already acknowledged that the typical contingent fee "will usually be permitted only if the representation indeed involves a significant degree of risk."24 Therefore, if we can accept the premise that cases that settle early did not involve a significant degree of risk, we must accept the conclusion that it would be unethical to charge a large contingency fee in such a case. Consequently, it is incumbent upon us as attorneys to adopt an alternative to such a practice. There may be ways in which the Common Good proposal could be changed and improved. However, the underlying principle is compelling. The current state of affairs can only exacerbate disrespect for the rule of law. Reform is necessary to give meaning and life to the fundamental fiduciary norms of our profession. It is time to make the ideals embodied in the current rules a reality.

Footnotes

1. No matter the merits of the tobacco settlement, the $30 billion in fees, payable over the next 25 years, awarded to the approximately 300 lawyers from 86 firms is nearly without equal. Countless newspaper and magazine articles have detailed accounts of attorneys from the respective states earning thousands of dollars per hour for their work in the tobacco litigation. See, e.g., Daniel Wise, Judge Freezes $625M Tobacco Award to Law Firms, N.Y.L.J., October 23, 2002, at http://www.law.com/jsp/article.jsp?id=1032128807449 (discussing how attorneys representing New York state in tobacco settlement awarded sum amounting to $13,000 per hour); Pamela Coyle, Tobacco Lawyers Reveal How They'll Divvy Up Fee, New Orleans Times-Picayune, May 12, 2000 (discussing how Louisiana attorneys representing the state will receive $6,700 an hour for their services); Susan Beck, Trophy Fees: A behind-the-scenes account of the controversial awarding of $13 billion to the plaintiffs' tobacco bar, The AM.Law., December 2, 2002, at http://www.nylawyer.com/news/02/12/120202i.html (discussing how Mississippi attorneys representing the state will receive $22,500 per hour); Dennis Chapman and Richard P. Jones, Tobacco Accord Worth $2,853 Hourly to Firms, Milwaukee J. Sentinel, at http://www.jsonline.com/news/state/jul99/tobac13071299.asp (discussing how Wisconsin attorneys representing the state in the tobacco suit will receive $2,853 per hour).

2. Information about Common Good can be found at http://www.cgood.org/about/.

3. See, e.g., Attorney Grievance Comm'n v. Kemp, 496 A.2d 672, 678-79 (Md. 1985) ("[Where] the risk of uncertainty of recovery is . . . low . . . it would be the rare case where an attorney could properly resort to a contingent fee . . . .); Virginia State Bar Association, LEO 1461 (April 13, 1992) cited in Nat'l Reporter on Legal Ethics and Professional Responsibility, Va Ops. 21 (1992) ("[M]atters which carry no such risk to the lawyer are not usually matters in which a contingent fee arrangement is appropriate."); Stewart Jay, The Dilemmas of Attorney Contingent Fees; 2 Geo. J. Legal Ethics 813, 835 (1989) ("[C]ontingent fees are permitted only if the representation involves a significant degree of risk.").

4. Utah Bar Ethics Advisory Opinion Committee, Op. 114 (1992), at
http://www.utahbar.org/ opinions/html/114.html.

5. Public Citizen's Critique of Common Good's Proposal to Amend the Ethical Rules for Utah Attorneys, July 14, 2003.

6. Derek Bok, The Cost of Talent: How Executives and Professionals are Paid and How it Affects America, 140 (1993).

7. See, Insurance Research Council, Paying for Auto Injuries (forthcoming Jan. 2004).

8. See, id.

9. See, Jeffrey O'Connell, Brown & Smith, Yellow Page Ads as Evidence of Widespread Overcharging by the Plaintiff's Personal Injury Bar - And a Proposed Solution, 6 Conn. Ins. L.J. 423, 427 (2000),

10. American Trial Lawyers' Association, Keys to the Courthouse: Quick Facts on the Contingent Fee System, at 3 (1994).

11. See, Lester Brickman, Contingent Fees Without Contingencies: Hamlet Without The Prince of Denmark, 37 UCLA L. Rev. 29, 104 (1989) (citing as other grounds for inflated pricing of attorney services: mandated minimum fees, advertising and solicitation restrictions, and limits on group legal services and legal clinic operations).

12. Lester Brickman, Effective Hourly Rates of Contingency Fee Lawyers: Competing Data and Non-Competitive Fees, 81 Wash. U.L.Q. (forthcoming November 2003).
13.Insurance Research Council, Injuries in Auto Accidents: An Analysis of Insurance Claims, at 77-78 (1999).

14. As the leading treatise explains: "[T]he [contingent] fee is determined by a percentage of the total recovery (usually between three percent and ten percent) or a percentage of the difference between the final award and the initial offer (usually between twenty percent and thirty-three and a third percent)." 8A Nichols on Eminent Domain ¤15.06(3) (3d ed. 1994)

15. In re: Quantum Health Resources, Inc. 962 F. Supp. 1254, 1258 (C.D. Cal. 1997) (citing Janet Alexander Do Merits Matter? A Study of Settlements in Securities Class Actions, 43 Stan. L. Rev. 497, 525 (1991).

16. Id. at 1259.

17. See In re: Teichner, 470 N.E.2d 972 (Ill. 1984).

18. See Leslie I. Boden et al., Reducing Litigation: Using Disability Guidelines and State Evaluators in Oregon, 30 1991). See also Leslie I. Boden, Reducing Litigation: Evidence from Wisconsin, 18, 22-25 (1988).

19. See, e.g. Citicorp Real Estate Inc. v. Buckbinder & Elegant, 503 so.2d 385 (Fla. Dist. Ct. App. 1987); Dunham v. Bently, 72 N.W. 437 (Iowa 1897); Sedbrook v. McCue, 180 P. 787 (Kan. 1919); Board of Educ. v. Thurman, 247 P. 996 (1926).

20. Utah Trial Lawyers Association's Memorandum in Opposition to Petition for Rulemaking to Revise the Ethical Standards Relating to Contingency Fees, July 14, 2003.

21. Public Citizen's Critique of Common Good's Proposal to Amend the Ethical Rules for Utah Attorneys, July 14, 2003.

22. Joint Economic Committee, 18th Cong., Report on Choice in Auto Insurance: Updated Savings Estimates for Auto Choice, at Appendix B, available at http://www.house.gov/jec/tort/07-24-03.pdf.

23. Preamble: A Lawyer's Responsibilities, Utah R. Pro. Con.

24. Utah Bar Ethics Advisory Opinion Committee, Op. 114 (1992), at http://www.utahbar.org/opinions/html/114.html (quoting Committee on Legal Ethics v. Tatterson, 352 S.E.2d 107, 113-14 (W. Va. 1986)).

About

This page contains a single entry from the blog posted on January 2, 2004 7:48 AM.

The previous post in this blog was Discipline Corner.

The next post in this blog is Appendix I for Proposed Contingent Fee Restrictions.

Many more can be found on the main index page or by looking through the archives.

The Utah State Bar presents this web site as a service to our members and to the public. Information presented in this site is NOT legal advice. Please review the Terms of Use for more policy, disclaimer & liability information - ©Utah State Bar email: info@utahbar.org