Notions of Fairness and Contingent Fees

Article excerpt

INTRODUCTION

Notions of fairness occupy a prominent position in the law generally, and in assessing the validity of transactions and the need for their regulation, in particular. Fairness judgments Can refer to various aspects of a transaction, yet their primary object is the adequacy of remuneration: does each party receive fair value in return for what she gives? One type of transaction whose fairness has been extensively and hotly debated is the hiring of attorneys on a contingent fee (CF) basis by plaintiffs in tort and other actions. This article reports and analyzes findings of several experiments designed to ascertain what factors determine people's judgments of the fairness of CF arrangements, how these judgments affect the market for attorneys' services, and what broader implications can be drawn from these judgments. Assessing the fairness of transactions obviously entails normative judgments, and we shall indeed discuss normative issues involved in these judgments. However, our primary focus is not normative. Rather, the article strives to elucidate the way people form fairness judgments regarding CF arrangements and possible mechanisms through which these judgments affect the market.

CF arrangements are the standard method of financing civil litigation in various types of suits, including personal injuries. Under such arrangements, an attorney's fee is contingent upon the success of the claim, calculated as a certain percentage of the amount recovered, and paid upon recovery. (1) In the United States, the conventional flat CF rate is 33% of the recovery. When the rate depends on the stage at which the case ends, it is usually 25% if the case does not go to trial, rising to as high as 50% if the case reaches an appellate court. (2) Many statutes in the United States and elsewhere regulate CF arrangements by setting caps on CF rates for specific types of suits, such as medical malpractice and road accidents. (3) In addition, courts, and sometimes the bar, are authorized to judicially or quasi-judicially review the reasonableness of fees on a case-by-case basis. (4)

Advocates of CF point out that CF arrangements enable plaintiffs of limited financial means to secure otherwise unaffordable legal services. These CF arrangements increase access to the courts, thereby empowering the underprivileged and forcing injurers to internalize the costs of their activities. (5) Essentially, CF arrangements provide clients with credit (since the fee is only paid upon recovery) and with a sort of insurance (since the fee is not paid if the claim fails). (6) CF arrangements induce attorneys not to take cases whose expected value is too small, thus saving their clients, and the court system, the costs involved in pursuing such claims. A CF arrangement also incentivizes the attorney to win the case or attain a favorable settlement, and at the same time to avoid investing too much time in handling it. (7) Given these additional benefits to the client, it is argued that the effective hourly rate (EHR) resulting from the prevailing CF rates--the expected fee divided by the number of hours the lawyer works on the case-is very reasonable compared to prevailing hourly rates. (8)

Critics of current CF practices portray a very different picture. They argue that the insurance element of CF is illusory, for there is typically no real risk involved in the cases attorneys take on a CF basis. (9) Similarly, the credit element should not add much to the fee because the attorney enjoys an excellent collection method: she deducts her fee from the award before forwarding it to her client. (10) Current CF rates, so it is charged, reflect various market failures, including plaintiffs' inability to assess the value and prospects of their case and the scope of work involved in handling it, lawyers' uniform pricing practices, the absence of price advertisements, clients' prohibitive search costs, and the prohibitions against the purchase of tort claims and against brokerage of lawyers' services. …