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August 6, 2010

The Standard Contingency Fee and the ABA

Filed under: — David Giacalone @ 1:00 pm

The “Standard” Contingency Fee and the ABA:
Protecting Fees Rather than Injured Clients
by David A. Giacalone

– orig. posted at the HALT Forum (April 11, 2002) –

Open Letter to:

Timothy J. Muris, Chairman, Federal Trade Commission

Dear Chairman Muris:

I am writing to challenge you and the Commission to take action on behalf of the “average” consumer of legal services.

In the fourteen years since I left the FTC, I have learned that lawyering is much different for consumers on Main Street than it is for the corporations that appear before the Commission, which can bargain hard and effectively with attorneys over price and service options. Despite special ethical and fiduciary obligations to clients, far too many lawyers seem to “protect” unsophisticated legal consumers by depriving them of information and options, while using their professional organizations to protect themselves from competition.

I am writing to you now in response to the adoption of comprehensive New Model Rules of Professional Conduct by the American Bar Association (ABA), on Feb. 5, 2002 — and, specifically, in response to the adoption of fee-related provisions that appear to be crafted to prevent competition over personal injury fees, by removing ethical restrictions on the use of the “standard” contingency fee.  Click to see the Redlined Version, showing all changes from the prior Model Rules.

The New Model Rules are the culmination of the ABA’s Ethics 2000 project. They are a great disappointment to consumer advocates and legal ethicists, who had hoped to bring the Rules into a new millennium, by assuring that law clients are well-informed consumers, aware of their rights and options. Instead, the New Rules seem far more appropriate to the guild mentality of the Middle Ages than to the spirit of the Information Age.

In an important example and symbol of the ABA’s disdain for the average client, the House of Delegates specifically rejected the proposal by the Ethics 2000 Commission that clients be given a written statement of the hourly or flat fee that would be charged by the lawyer (despite an exemption for fees likely to total less than $500). [Ethics 2000’s failure to ensure better-informed clients is raised in my article “Counselors Oughtta Counsel” (Dec. 8, 2000).

With regard to contingency fees, changes in Rule 1.5 make it clear that the ABA has capitulated to defenders of the “standard” contingency fee. The approved Rule changes reverse recent attempts within the ABA, and by client advocates across the nation, to apply traditional ethical and fiduciary duties to the use of contingency fees — to ensure that attorneys do not take advantage of uninformed clients and that clients are allowed to make informed choices about fee levels, pricing arrangements, and risk allocation (by, for example, having the option to pay an hourly fee when the defendant’s liability is clear and collection certain).

As you know, no state or federal law requires injured consumers to hire personal injury lawyers on a contingency fee basis. And no rule sets the level of contingency fees (except for ceilings). However, most consumers just assume that personal injury cases must be handled on a contingency fee basis and that the fee level cannot be negotiated. Instead of telling clients their rights, virtually every personal injury lawyer presents a contingency fee contract to each client that states the “standard” or usual fee in that jurisdiction – one-third in many places, 40 percent in others — and always the maximum contingent fee allowed in the jurisdiction. As a result, clients suffering personal injuries are forced to become partners with their lawyers (granting them a share of their claim to get representation) and clients with the best cases subsidize those with the weakest — skewing the justice and economics of injury cases, and often unfairly enrichening lawyers while shortchanging seriously injured clients.

In 1994, to correct this situation and other ethical issues surrounding contingency fees, the American Bar Association’s Standing Committee on Ethics and Professional Responsibility spelled out, in Formal Ethical Opinion 94-389, the ethical principles that should be applied in every contingency fee situation. Despite the usual deference paid to the ABA’s ethics opinions, and the call in Opinion 94-389 that the profession “redouble its efforts” to assure that lawyers know and comply with their obligations, the landmark decision was totally ignored in practice by the profession and has now been greatly undermined by the New Model Rules.

Opinion 94-389 fully explains the ethical principles for using contingency fees. It concludes that a lawyer may not insist on a contingency fee and should not apply a standard percentage fee to each client. Instead, Opinion 94-389 requires the lawyer to fully inform the client “of all appropriate alternative billing arrangements and their implications,” including the chance to work on a “reasonable fixed fee basis.”

Furthermore, the Opinion stresses that the same factors used to determine the reasonableness of attorney fees under the Model Rules (and the predecessor Model Code) apply to contingency fees, and that the lawyer should “take all these factors into account in evaluating every case” and discuss them with every p/i client.

In short, the percentage fee charged should reflect the lawyer’s best estimate of how likely the client is to win, how much money is likely to be rewarded and collected, and how much work the lawyer is likely to have to do. When the defendant is clearly liable and has deep pockets (or even adequate insurance), a reasonable fee should be significantly less than one-third, because the lawyer is taking a very small risk and is adding very little to the value of the claim; or, the client should be allowed, if he has the means, to pay a reasonable hourly fee. Thus, Opinion 94-389 rebuffed extreme arguments that would ban all contingency fees, but it insisted that the ethical use of contingency fees requires flexibility, fairness, and well-informed client choice.

If followed, the obligations spelled out in Opinion 94-389 would have created significant competition among the personal injury bar. P/I lawyers, who already assess the risk of each case before deciding whether to accept it, would have to share that assessment with their client and thus justify the level of the contingency fee or its use at all — allowing clients to compare firms, offers, assessments, etc. P/I lawyers might actually have started to talk about and advertise competing fee levels, a choice of pricing plans, sliding scales (such as, offering 11%-22%-33% fees for low-, medium- and high-risk cases, respectively), and fair risk assessment and risk-sharing with clients. However, competition never broke out.

Whatever maneuvering and stalling happened in the wake of Opinion 94-389, there clearly was a debate within the Ethics 2000 Commission, and later at the level of the ABA House of Delegates, on issues relevant to the use of standard contingency fees. Rather than reaffirming or codifying the Opinion 94-389 principles, however, the final version of the new Model Rules have undermined them in several important ways:

First, the final version of the New Model Rules eliminates all phrases that directly support the reasoning of the 1994 Opinion. For example, the ABA has deleted from the current official Commentary to Rule 1.5 (fees) the statement that “When there is doubt whether a contingent fee is consistent with the client’s best interest, the lawyer should offer the client alternative bases for the fee and explain their implications.” This sentence had been specifically quoted by Opinion 94-389 and earlier informal opinions that came to the same conclusion about the potential for contingency fees to violate the client’s best interests and about the need to offer fee options.

In addition, the Ethics 2000 final Report (after receiving outside comment and input) removed from its own earlier proposals a clause explaining that “the degree of risk assumed by the lawyer at the outset of the representation,” is relevant to the reasonableness of contingency fees. Similarly, it eliminated a phrase that echoed Opinion 94-389, stating that “all” of the traditional factors relevant to the reasonableness of a fee are applicable to contingent fees (e.g., ” the time and labor required, the novelty and difficulty of the questions involved, and the skill requisite to perform the legal service properly”)

Instead, the final Ethics 2000 proposal added the following two sections of Commentary to Rule 1.5, which was adopted by the full ABA on February 5, 2002:

Commentary to Rule 1.5: “[1] Paragraph (a) requires that lawyers charge fees that are reasonable under the circumstances. The factors specified in (1) through (8) are not exclusive. Nor will each factor be relevant in each instance. . . . .”

“[3] Contingent fees, like any other fees, are subject to the reasonableness standard of paragraph (a) of this Rule. In determining whether a particular contingent fee is reasonable, or whether it is reasonable to charge any form of contingent fee, a lawyer must consider the factors that are relevant under the circumstances. Applicable law may impose limitations on contingent fees, such as a ceiling on the percentage allowable, or may require a lawyer to offer clients an alternative basis for the fee.”

This Commentary weakens Opinion 94-389 and supports the continued use of the Standard contingency fee in several ways: (a) After a century of interpretation, paragraph [1] states for the first time that not every item in the list of factors in Rule 1.5(a) might be relevant in every case –although the list is connected by the conjunctive “and” not “or” and has always been read to be inclusive. Similarly, Paragraph [3] allows the lawyer to consider only “the factors that are relevant” instead of the entire list of factors given in Rule 1.5 and in Opinion 94-389. While each factor might not be important in every case, each certainly is relevant and worth considering. This change makes little sense outside of the battle over contingency fees, and will clearly make it easier for p/i lawyers to say that factors such as risk and amount of work to be performed are irrelevant when a contingency fee is used.

(b) The statement in paragraph [3] that contingency fees must meet the reasonableness test merely re-states the obvious and suggests a review that simply does not exist. Most state courts assume the reasonableness of a contingency fee, and will not review it, as long as it does not exceed the state’s maximum and the client signed a contract agreeing to the amount — which is to say, there is no effect review of the reasonableness of a fee, if the standard contingency fee contract is used. Thus, the first sentence in para. [3] appears to be filler — a distraction from the goal of bolstering the standard fee.

And, (c) Given the way the Model Rules use “alerts” about “applicable law,” paragraph [3] clearly implies that the New Model Rules do not themselves “require a lawyer to offer clients an alternative basis for the fee.” There seems to be no benign reason for this sentence on applicable law: Every attorney already knows that ceilings exist, and there appear to be no laws in existence in any jurisdiction specifically requiring alternative fee arrangements. Replacing the strong admonition in the current Commentary to Rule 1.5 (the last sentence of paragraph [5]) with this weak Alert, has one primary effect: It allows the continued use of standard contingent fees without interference from the New Model Code. And, it allows p/i lawyers to continue their universal mantras that “we don’t work on an hourly basis, so we don’t have to explain options” and “contingency fees are always in our client’s best interests, because we only take money if we win.”

By adopting the current fee provisions, the ABA has, in effect, blessed the anti-competitive status quo — signaling that using the standard contingency fee for virtually every personal injury client is acceptable practice, no matter how easy the case, or how little the lawyer has to do to win and collect. This will effectively reverse the forces for consumer choice, innovation and competition that were inherent in Opinion 94-389 and are inherent in traditional fiduciary and ethical principles. The adoption of the new Model Rules is significant, because the vast majority of states have chosen over the years to use the ABA’s Model Rules of Professional Conduct for Lawyers as the basis for their own ethical codes and lawyer discipline. Moreover, the passage of an entirely new version of its Model Rules will make it harder for single-issue changes to be made on the state level.

With clever lawyering and editing, personal injury lawyers have apparently used Ethics 2000 to re-write ethical history and the ethical code, and stymie calls for reform. Despite rabid advertising rivalry by hordes of lawyers, p/i clients who are not sophisticated enough to know their rights and assert them strongly will continue to be denied price competition.

The existence of a monolithic “standard” contingency fee in each state has always seemed an economic (and ethical) improbability, absent some kind of agreement or pressure not to compete on pricing terms. How, for example, can the fee level be the same — and just happen to be the maximum fee allowed by law — when law firms have such different costs and experience levels, and face such a wide spectrum of risk among prospective clients?

The profession’s response to Opinion 94-389, along with the ABA’s Ethics 2000 project, and its resultant New Model Rules, offer antitrust enforcers an important focal point to investigate whether there has been unlawful joint action by competitors that directly hampers price competition and consumer choice, and appears to offer no counter efficiencies. My message to the Commission is simple: The FTC is in a unique position to take action on behalf of the personal injury client, by actively pursuing an antitrust investigation, an informational campaign aimed at consumers, and an advocacy campaign before local tribunals that will decide to fate of the New Model Rules in each state.

If antitrust prosecution is not shown (after investigation) to be warranted, consumers would nonetheless be greatly helped by an informational campaign telling them that there is no set fee, and that they have the right to negotiate a fair contingency fee (one that reflects the risk the lawyer is taking of working without being paid), and to seek alternative fee arrangements. An educated public can both assert its rights and motivate innovative competition by hungrier or savvier p/i lawyers.

The New Model Rules produced by the “liberal” ABA should convince even the most optimistic consumer advocate (or faithful laissez-faire believer in market forces), that the organized bar has no interest in taming the abuses of the standard contingent fee (and that the market is broken). Legislation on the national or state level also seems highly unlikely, since generous trial lawyer lobbyists now seem to have control or veto power over the very politicians and not-for-profit organizations we might have expected to lead such a fight. Any solution that protects consumers and competition will almost certainly come from the Federal Trade Commission, or possibly the Department of Justice.

It is time for a serious antitrust look at the organized legal profession, which has made an art recently, not of drafting anti-competitive rules of conduct, but of ignoring and weakening existing ethical rules — rules that would, if enforced, enhance consumer information, choice, innovation and competition. The standard contingency fee seems to be the perfect place to start, since it defies the laws of common sense economics and competition; it affects clients who do not have the information nor clout to protect themselves; and it can unfairly shift millions of dollars from the individual victim of an injury to an undeserving lawyer.

Thank you for considering this letter. I hope you will let your enforcement staff know that the issues raised deserve full consideration and investigation.

Respectfully submitted,
David A. Giacalone (Retired Member, DC & NY Bars)
[Former Assistant to the Director (Timothy Muris), FTC Bureau of Competition;
Former Assistant to the Director (Albert Kramer), FTC Bureau of Consumer Protection]
– SlicingThePie click to see f/k/a‘s 4-part essay on the economics and ethics of the use of the standard contingency fee –

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