Question

Chapter 4 discusses Business Ethics. One area of the law that is often debated is whether attorneys should be allowed to charge high contingency fees (fees for their service if your case is won) -often reaching 40 percent of the total settlement.

Do you think the government should put a cap on contingency fees? Is there an ideal percentage to charge?

Answer 1

A client pays a contingent fees to a lawyer only if the lawyer handles a case successfully. Lawyers and clients use this arrangement only in cases where money is being claimed—most often in cases involving personal injury or workers' compensation.

In a contingent fee arrangement, the lawyer agrees to accept a fixed percentage (often one third) of the recovery, which is the amount finally paid to the client. If you win the case, the lawyer's fee comes out of the money awarded to you. If you lose, neither you nor the lawyer will get any money, but you will not be required to pay your attorney for the work done on the case.

A client is not charged attorney fees if he loses the case. If the client recovers damages from settlement or a favorable verdict, the attorney receives the fee from the recovery. The attorney's permitted fee varies depending on the country, and even local jurisdictions.

In the US, for example, the fee is generally based on the contractual agreement between the attorney and the party, but is also limited by local rules for "reasonableness". See e.g., Miss. Rule of Prof'l Conduct 1.5. In most jurisdictions, contingent fees are "reasonable" as high as 33% to 45% of recovery. Attorneys charging unreasonable fees may be subject to professional sanctions. The fee is calculated as a share of the eventual damage judgment or settlement won by the client. The percentage allowed is subject to the ethical rules of professional conduct, and in many circumstances, statutory limitations.

In the UK, on the other hand, the client is liable for the normal fee (based on hourly billing plus a profit element) plus a success (or bonus) fee (no more than 100%). Most lawyers charge a success fee much less than this, 25-50%. In English law, fees are subject to compliance with the statutory scheme.

One main advantage of contingency fees is that you do not have to pay your lawyer up front. That way, you are not faced with large legal bills while you are waiting for the case to make its way through the courts. Contingency fees can also be negotiated, giving clients flexibility. Many feel that this “opens the courthouse doors” to lower-income people who otherwise would not have access to legal assistance.

Another advantage is that your lawyer does not collect a fee if you lose (although you still may be responsible for costs the lawyer incurs trying your case). This can provide some peace of mind for you as well – if your lawyer is willing to risk not collecting a fee based on your case, then you probably have a good shot at winning your lawsuit.

Even if your attorney believes the case is closer than your attorney would like, you can be assured that your attorney will be highly motivated to work hard to ensure that the case goes your way. The fact the lawyer doesn’t collect any fees if the client loses the case means that either the lawyer believes the case is an easy victory and/or the lawyer will work extremely hard to ensure the case will go the client’s way.

The main disadvantage of contingency fees is that it may end up costing you more than standard hourly billing. If you agree to a contingency fee of one third of your eventual award, you owe that amount regardless of whether it takes one year for the case to wind its way through the courts, or if your case is settled within one week. Some lawyers may offer a flexible contingency fee depending on the result of your case, and it is worthwhile to ask if that is available when hiring a lawyer.

The other major disadvantage of contingency fees is that attorneys who use contingency fees can be very selective of the cases they take on. Attorneys who use contingency fees will try to avoid cases they believe are not easy victories. Attorneys who do take on “risky” cases will often negotiate higher fees as a result.

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. 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.