Problems with Contingent Fees

Problems with Contingent Fees

Contingent fees are unfair because plaintiffs are not allowed to recover the cost of the fee from the defendant--that is, add the fee to the judgment awarded.

Plaintiffs must prove the economic worth of their injuries. (See Chapter 4.) In a simple case, this might be the extra medical bills and lost wages incurred as a result of the negligence. If these total $20,000 and there are no other alleged injuries, then the jury will be limited to awarding $20,000. Approximately half of that will go to paying the attorney and the costs of the litigation. Therefore the purpose of tort law--to make the plaintiff "whole" by compensating him or her for the losses due to the defendant's negligence--is not fulfilled. The plaintiff is able to recover 50 percent of the actual losses because the defendant does not have to pay the plaintiff's attorney's fees and costs of court. The problem of recovering litigation costs drives many of the claims for imaginative damages.

Contingent fees create an undue emphasis on the extent of the plaintiff's damages, and they encourage the filing and prosecution of cases with large damages but little negligence. Take the case of parents who come to the attorney's office with a brain-damaged child requiring custodial care. The potential recovery is so large that it is worth searching for any possible negligence to justify a lawsuit. Conversely, contingent fees deny access to the courts to plaintiffs with meritorious claims but low damages. Every plaintiff's medical malpractice lawyer has turned away cases in which the patient was injured by clear, even gross, negligence, but the potential recovery was too small to cover the cost of litigation. In general, if the provable damages are not in excess of $100,000, it does not make economic sense for an attorney to take the case.

In both law and medicine, it is ethically questionable to stop providing services to a client because the client cannot afford the fee. In criminal cases, the courts make it nearly impossible for an attorney to withdraw once representation has begun. As a result, criminal attorneys demand fees, which are nonrefundable, in advance. (There is also the problem of collecting from the incarcerated client.) In civil lawsuits, it is difficult to withdraw after the lawsuit has been filed. Ideally, every case will be investigated before a lawsuit has been filed. The problem is that the defense often refuses to cooperate in the investigation of a case. The plaintiff's attorney must decide whether to sue based on limited information. This encourages the filing of a case with large damages in the hope that liability can be found as the case proceeds. For an attorney, this is the most ethically responsible step. Refusing to represent the client because the defense makes it difficult to investigate the case would compromise the client's rights.

Many state legislatures are capping the fees of plaintiffs' attorneys,[4] typically in two ways: sliding scale caps and limits on the percentage that the attorney may charge. In the sliding scale system, the fees that the attorney may charge for small cases--those under $100,000--are unaffected. Using the previous example, in a case settled before trial, the attorney would get 40 percent ($40,000) and be reimbursed for expenses (perhaps $5,000). As the award increases, the allowable fee, as a percentage of the award, is diminished, falling to perhaps 10 percent of the proceeds over $1 million. This type of cap does not affect the initial decision to accept the case; rather, it encourages the attorney to settle the case at a discount. After a certain point in the history of a case, it acquires a settlement value. In the traditional contingent fee contract, the attorney is provided an incentive to continue to invest work and money to raise that settlement value. With a sliding scale cap, the reduced reward for increasing the value from, say, $900,000 to $1 million may not offset the work involved.

Limiting the percentage of an award that the attorney may claim as a fee affects the litigation process in a different way. Capping the percentage charged (perhaps at 25 percent) raises the threshold value for accepting a case. A case that was profitable at 40 percent ($100,000) would have to be worth $160,000 to yield the same fee at 25 percent. It has been argued that sliding scale caps prevent attorneys from gaining windfalls. Percentage caps, however, serve only to deny access to the courts.

[4]Birnholz RM: The validity and propriety of contingent fee controls. 37 UCLA L Rev 949 (1990).

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Problems with Contingent Fees