Facts about Fees: Lessons for Legal Ethics

By Baker, Lynn A. | Texas Law Review, June 2002 | Go to article overview

Facts about Fees: Lessons for Legal Ethics


Baker, Lynn A., Texas Law Review


Commentary

There is no question that some lawyers misbehave, and that attorneys' fees create incentives for lawyers to do so. Less clear, and less frequently discussed, is whether the ethics rules regarding fees affect these incentives for misbehavior and, if not, whether there is any empirical basis for those rules. In this Comment, I briefly take up these questions with regard to two popular fee arrangements, the contingent fee and the hourly rate. I further limit my analysis to an especially problematic category of attorney misbehavior-misbehavior that stems from a lack of alignment between the attorney's incentives and the best interests of the client (i.e., what economists call "agency problems"1).

My discussion takes up and builds upon Professor Herbert Kritzer's conclusion in his contribution to this Symposium that "there is no empirical evidence that any type of fee arrangement increases the likelihood of unethical behavior, although the specific nature of unethical conduct most likely does vary depending on the type of payment structure."2 My examination proceeds in four parts. I begin by briefly summarizing certain incentives toward misbehavior that the contingent fee and the hourly rate each provide. IMAGE FORMULA5

I then discuss the existing ethics rules governing fees and suggest that those rules seem unlikely to alter any of the incentives toward misbehavior-for either type of fee arrangement-described in the previous part. Third, I present some questions raised by the existing ethics rules that deserve further study and empirical examination. I conclude with three lessons that drafters of legal ethics rules might take away from this analysis.

A. Fee Arrangements and Agency Problems: The Contingent Fee Versus the

Hourly Rate

The contingent fee is undoubtedly the fee arrangement that has received the most scholarly scrutiny.3 Not surprisingly, the incentives it provides for attorneys to misbehave have provoked much discussion.4 Within the specific category of "agency problems," three such incentives are particularly noteworthy. First, and arguably most importantly, the contingent fee may provide an incentive for attorneys to attempt to settle the plaintiff-client's case too quickly and for too little. This is particularly significant in a regime under which more than ninety percent of all cases settle.5 Unlike the plaintiff-client, who typically is involved in only one lawsuit at a time, a contingent fee lawyer is likely to have both an existing portfolio of lawsuits IMAGE FORMULA8

and the opportunity to take on additional cases. Thus, the lawyer's decision to pursue any one case has measurable opportunity costs in terms of both time and other resources.6 These opportunity costs may rationally induce the lawyer to settle plaintiff-client A's case for $100,000 today, rather than continue litigating the case for another two months in the hope of settling it for $150,000-if spending those two months on some other case is likely to earn the lawyer more than the fee on the additional $50,000, or is more likely to earn the lawyer the same amount.

Of course, the client must consent to any settlement of his case,7 so one might reasonably ask why the plaintiff-client would agree to settle his case for too little. One plausible explanation is that the client may not appreciate that the settlement offer is too low because setermining the value of the case, net of litigation expenses and the risk of non-recovery, is far from a precise science. In addition, the plaintiff-client has hired his attorney to provide precisely the sort of "expert" information reflected in the valuation of the client's claim. the client is therefore highly likely to heed the attorney's (potentially self-interested) recommendation to settle at a particular time and for a particular amount.

The lawyer's opportunity costs and the resulting principal-agent mismatch are at the root of two other incentives toward misbehavior that the contingent fee provides.

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