Cardozo law professor Lester Brickman has been a longtime critic of the contingency fee system. So it’s no surprise that his latest work, Lawyer Barons: What Their Contingency Fees Really Cost America (introduction here), has a lot to say about how contingency fees skew the incentives of plaintiffs’ lawyers. Among the most interesting observations he makes:
Many contingency fees don’t reflect actual risk. Brickman documents how often, lawyers don’t bear the risk of not getting paid, in part because of "careful case selection." This is not shocking; most plaintiffs’ lawyers admit readily to being selective about the cases they take. And that selectiveness is a feature, not a bug. We want plaintiffs’ lawyers to be selective, because it will reduce the number of meritless claims clogging the courts. But few have pointed out that this creates a mismatch between the justification for larger fees and the reality of the risk plaintiffs face. Brickman takes a first stab at this; he estimates that lawyers reject two-thirds of the clients who approach them, resulting in a 70-90% success rate for cases taken. And he also estimates the "effective hourly rates" of work on various kinds of cases. According to Brickman, class-action lawyers collect effective hourly rates of between $5,000 and $25,000 from their contingency fees. (Incidentally, Brickman does not address one phenomenon that a number of defense lawyers have reported–and that I’ve experienced personally. This is the phenomenon of "grossing up" the fee. Instead of calculating a fee as 1/3 of the plaintiff’s recovery, a plaintiff’s lawyer will take the recovery as a given, and then tack on another 30%-50%, "grossing up" the amount so that this additional amount is 25%-33% of the "total amount." Using this method allows a $500,000 fee to be "33%" of a $1 million recovery. It’s safe to say that this calculation does not reflect risk so much as it does Hollywood-style accounting.)
Contingency fees result in acceptance of inferior settlements. Brickman’s logic here is simple. One would assume the better the offer, the better the fee. But that’s not quite right. A lawyer’s calculation as to whether an offer is good is not OFFER/3, but (OFFER/3)-HOURS-OTHER COSTS-OPPORTUNITY COSTS. The longer a case goes on, the more HOURS and OTHER COSTS rise; and the more OPPORTUNITY COSTS he incurs. So a lawyer may very well counsel his client to accept a smaller offer, because his fee net hours and costs will be higher. (In a particularly interesting moment, Brickman compares these incentives to those created by using stock options as corporate compensation.)
Contingency fees (and reimbursement of costs) provide incentives to inflate costs. If a fee is driven by the amount awarded, and the amount awarded includes reimbursement of medical costs (for a plaintiff) or a separate reimbursement of costs (for class actions), then plaintiffs lawyers will maximize those costs to maximize their fees. This is also hardly shocking. After all, the inflation of costs and hours worked is a commonly-observed phenomenon among lawyers who charge by the hour. One supposed advantage of the contingency-fee system is that it bypasses this problem. But, as Brickman observes, it just shunts it to other places. For medical torts, lawyers don’t inflate their costs, medical experts inflate theirs (which inflates the total award). For class actions, Brickman unearths some surprisingly brazen evidence from a case in the early 2000s that securities plaintiffs’ firms were deliberately inflating the costs of reviewing discovery. And he also provides some examples from one of the most valuable sources of documenting plaintiff tactics in class actions: fights among plaintiffs’ lawyers over fees.
Contingency fees inflate costs by justifying themselves. One of Brickman’s most interesting observations is that, in class actions in particular, lawyers will hire experts whose sole purpose is to justify the fees they are charging. (He calls these "bless the fee" experts.) These experts don’t work for free, of course. And their costs tend to get folded into the costs submitted by the plaintiffs’ counsel.
So what use is Brickman’s work to defense counsel? On one level, it’s a great resource for understanding the incentives that drive plaintiffs’ counsel. While he’s clearly penning an indictment of the contingency-fee system, Brickman is a careful researcher, and takes great pains to document his findings. And he’s excellent at drawing connections that many others have not, even though they may have the same information at hand. But as Brickman himself observes, in class actions, most fee requests are one-sided affairs: by the time they occur, the defendant has already graduated to just wanting to get rid of the case, and most class members don’t have enough skin in the game to opt out of their $1, let alone object to the fees.
That said, Brickman’s book also has some practical benefits. In those rare cases where the defendant is actually defending against a fee request after a plaintiffs’ verdict, the book provides a clear roadmap to the tricks of the trade. Less obvious, but still important: when a defendant is engaged in settlement negotiations where its incentive is to minimize trial costs as opposed to settle a clear case of liability, Brickman’s work may help it to reduce the amount it has to pay. After all, when a defendant is working out a nuisance settlement or a cost-of-litigation settlement, it actually has incentives to maximize the recovery to the class (to get the settlement approved) and minimize the lawyers’ recovery (to minimize their incentive to bring another nuisance lawsuit). There, it makes a lot of sense to make sure that the lawyers are not inflating their fees.