Policy Review, Winter 1991

Sue City: The Case Against the Contingency Fee

By Walter Olson

(excerpted from The Litigation Explosion: What Happened When America Unleashed the Lawsuit, with some new material added)

[first of two parts] [to second part]

For years the New York City firm of Morris Eisen P.C. ran one of the nation's biggest personal-injury law practices, employing 45 lawyers and handling hundreds of cases at a time. Like all law firms that specialize in injury lawsuits, it worked on contingency -- keeping a share of its clients' winnings, if any ("no fee unless successful").

It all came undone in 1990 when a federal grand jury indicted Eisen and seven persons associated with his firm on charges that included bribing witnesses and court personnel, suborning false expert testimony, doctoring photographs, and manufacturing other physical evidence. Among those charged along with Eisen were two lawyers, a former office manager, and four private investigators who worked regularly with his firm.

Federal prosecutor Andrew Maloney detailed the charges. "They produced an eyewitness to two automobile accidents," he said. "The witness was never at either accident and, at the time of one accident, he was serving time on a forgery charge." In another case, where one of Eisen's employees claimed to have tripped at a racetrack parking lot, Maloney said one of the suspects used a pickax to widen a pothole so it could be blamed for the supposed incident. Two of the group were charged with causing a witness to give false testimony in another lawsuit where an injured woman claimed that a bus driver had signaled for her to cross the street into traffic; New York City settled the case for $ 1 million. Altogether the 19 lawsuits where wrongdoing was alleged had brought in $ 9 million in awards and settlements, of which the lawyers had pocketed an estimated $ 3 million in contingency fees, along with some additional sum to cover their reported expenses.

Around the rest of the country of wave of similar scandals was breaking. A front-page series in the MiamiHerald told how a North Miami legal practice had conspired to manufacture and exaggerate injury claims. Florida prosecutors followed with a 32-count indictment of three lawyers, two doctors, and three associates. A federal indictment charged two New Jersey lawyers and a doctor with 58 counts in an alleged scheme of massive fraud in auto-accident claims.

America's legal profession, it seems, is being cleaned up. Or is it? What may be needed is not just more crackdowns like those underway, but a rethinking of the modern American wisdom on legal ethics.

Temptations for Dishonesty

Lawyers as a profession face unusual temptations to engage in unethical conduct. No one knows better how to skirt or evade the law than someone trained in it, and huge amounts of money can hang on the choices made when no one is looking over a lawyer's shoulder. This can be tempting enough for the ordinary lawyer who guides inexperienced clients through large financial transactions. It can be even more tempting for the trial lawyer who specializes in lawsuits or threats of lawsuits. Litigation is mostly about the violent and chancy redistribution of wealth. It abounds in opportunities for perjury-coaching and witness-tampering, the faking of evidence, and the bribing of court personnel, all for what can be dizzyingly high stakes. It offers many chances for dishonest persons to become rich.

A job that offers enormous rewards for unscrupulousness will attract many unscrupulous people, and corrupt many people of ordinary character. Yet most of the ways to sort out the bad apples are not very promising. Criminal prosecution, disbarment, and other heavy-duty disciplinary measures can help in the few cases where abuses can be brought to light and proved conclusively. In practice, only a few relatively flagrant cases of lawyer misconduct are caught and corrected in this way, mostly embezzlement of client funds and the like. Advance screening of bar applicants for "good character" is a subjective affair that can imperil the merely unpopular applicant along with the shady one; it has fallen largely into disuse. Civil lawsuits against lawyers provide occasional recourse for victimized clients but next to none for victimized opponents.

What is really needed is a reduction in the temptations for dishonesty within the practice of law itself.

Ethics in Sports

The ethical rules of many professions share a common underlying principle: if temptations are allowed to get out of hand, many will yield. To put it in raw dollars terms, if under system A people can grab $ 1,000 by telling a lie, and under system B they can grab $ 1 million by telling the same lie, more people -- not all, but more -- will tell the lie under system B. No system could block all chances to profit from lying, cheating, and corner-cutting; that would be hopelessly utopian. Rather, a practical system of ethics tries to fence off the steepest and most slippery slopes. It lowers the rewards for dishonesty not to zero but to a point where most people will resist.

One of the standard ethical rules of professional sports forbids athletes to bet on their games. There are obvious reasons for not letting them bet against their own teams. The reasons for not letting them bet in favor are in the end no less compelling. Some athlete-gamblers would throw their strengths into certain contests at the expense of the season as a whole. More generally, kneeing and below-the-belt gouging of opponents would run wild: badminton would soon get as mean as hockey, and who can think what hockey itself would be like?

Likewise doctors have never been allowed to charge contingency fees -- to place, in effect, bets with their patients on the success of their therapies. Under such a system, doctors would dispense with their fees if a patient remained sick. If on the other hand he rallied, they would charge higher than normal fees. And if the patient got well enough to go back to work, doctors might even arrange to take a share of his future earnings. Why would this be unethical? In part because it would tempt doctors to depart from honesty. Under such a fee arrangement some doctors would portray transient maladies, best treated by doing nothing, as life-threatening to scare patients into promising a whopping contingency. Some would cure an illness with harsh remedies that left the body vulnerable to worse assaults later on. Some would allow patients who were still sick to believe they were cured, perhaps administering feel-good potions toward that end. Falsification of test results, bedside charts, and autopsy findings would go on constantly. Even doctors of ordinary integrity would feel their objectivity subtly disoriented, and the truly unscrupulous would find chances to become very rich indeed.

And so the custom arose of paying doctors by the hour, whether their patients recovered miraculously, feebly, or not at all. By achieving a surprise cure a doctor might hope to get valuable word-of-mouth and repeat business. But that is the difference between more and some, not between feast and famine. Many of the subsidiary rules of medical ethics, such as the separation of medicine from pharmacy, follow similar lines. By shielding doctors from a financial interest in drug-dispensing, we avoid clouding their decision whether to prescribe or withhold drugs in borderline cases.

America's Legal Exceptionalism

In virtually every country, society has deemed that lawyers, like doctors, should be shielded from the temptations of the contingency fee. The English common law, French and German civil law, and Roman law all agree that it is unethical for lawyers to accept such fees. In 1975 British judges strenuously opposed even a closely regulated version of the fee, in which a contingency suit could go forward as long as leading lawyers verified its reasonableness. They explained that lawyers would no longer make their cases "with scrupulous fairness and integrity."

The American exception on contingency fees developed naturally and inevitably from a wider and more profound American exception on legal fees in general, an exception that is central to understanding the problems of our legal system. America is the only major country that denies to the winner of a lawsuit the right to collect legal fees from the loser. In other countries, the promise of a fee recoupment from the opponent gives lawyers good reason to take on a solidly meritorious case for even a poor client. Oxford's Patrick Atiyah notes that "the reality is that the accident victim with a reasonable case should be able to find a lawyer with equal ease in England and America."

At first much of America tried a not very promising substitute for the contingency fee: volunteer legal service. Lawyers were supposed to make a reasonable effort to handle a poor person's claim for free when it appeared meritorious. When a suit of this sort was a money claim, and it succeeded, a now not-so-penniless client might offer the lawyer a grateful recompense, but was not obliged to do so. The system was based on two-way altruism, first from the lawyer, then from the beneficiary.

Systems that depend too heavily on pure altruism do not tend to chug along forever. Without a legal right to compensation lawyers did not devote enough time to these pro bono publico cases, and some meritorious claims slipped through the cracks. The straightforward solution to shifting fees to the losers of lawsuits was obstinately resisted. So, amid misgivings and reluctance, the contingency fee was admitted state by state; Maine was the last state to legalize it, in 1965. Restrictions confined the use of the fee to the necessary cases. The arrangement was to be discouraged unless a client was too poor to pay the normal freight. Most important, lawyers could represent only plaintiffs on this basis, and never defendants, either civil or criminal. And although contingencies were permitted in most money claims, they were disallowed in many other kinds of lawsuits, divorce in particular.

A further web of swaddling rules protected lawyers from dealings by which, purposely or not, they might end up obtaining stakes in the cases they pressed. They could not buy up a promissory note to collect at a profit, nor buy businesses or parcels of land to which lawsuits were attached unless their primary aim were to acquire the property rather than the incidental share of its value represented by legal claim. They could not give money to their clients for free for fear of the appearance that they were paying to keep a lawsuit alive (which, as the offense of "maintenance," was punishable at common law by imprisonment). In fact, they were advised not to enter into business dealings with their clients at all to avoid pitfalls of this nature.

The older American legal ethicists emphasized the need for vigilance against the special corrupting dangers of the contingency fee. Lawyers were to recognize that taking a share in the spoils subjected them to a sort of moral vertigo that should be shunned when not necessary and handled with tightrope care when it was. They would have to cultivate a special humility and detachment when they worked on this basis, trying harder than other lawyers to remember that winning wasn't everything, struggling to forget that victory in the case at hand might bring personal riches or that loss might bring a financial blow. In short, the system was asked to run on a new kind of altruism, the self-restraint of lawyers with fortunes at stake.

"My Ads Can Make You Millions"

Just as salesmen paid on commission step forward and make eye contact when the customer walks in the store, so contingency-fee lawyers have a strong incentive to get clients interested in the merchandise. For such reasons the standard American text on legal ethics, by Judge George Sharswood of Pennsylvania said the fee gave "an undue encouragement to litigation." Street-level views could be much more scathing. By the 1920s one federal prosecutor was calling the fee the "arch tempter to the ambulance chaser" (as well as the fount of "false claims, witness fixing, and perjury").

With their incentive to go for volume, contingency-fee lawyers have long done far more than their share of advertising and solicitation, both lawful and unlawful. "My custom TV ads can make you millions," promises a full-page pitch on page three of the December 1985 Trial, the magazine for injury lawyers. "Twenty-seven lawyers have become millionaires while running my custom TV commercials, 9 are multi-millionaires, and 22 are close (net worth between $ 450,000 and $ 975,000)," claims independent producer Paul Landauer. "Some started with less than nothing! One borrowed $ 6,000 to go on the air and took in an off-shore injury case the second week that settled for $ 3.8 million." Smart lawyers, he explains, know that attracting clients "in bunches and droves" increases the odds of getting a "big one." "I give you an elegant, 100-percent custom, 'dream lawyer' image the TV audience can't wait to call."

Cultivators of Discontent

The initial step of getting potential clients to dial the operators standing by to receive their call is but the first in the encouragement of litigation. That encouragement naturally extends to every stage of the dispute. The true cultivator of discontent does not sow the seeds of grievance and then retire while the seedlings grow or wither as Nature ordains. He waters and fertilizes the tender shoots to a state of garish bloom.

The popular television show L.A. Law has made famous the character of divorce lawyer Arnie Becker. In one episode, a woman comes in who is thinking of splitting up with her husband: they haven't been fighting, but they seem to have drifted apart; maybe it's time to work out a parting of the ways. As Arnie drops a word here and a hint there, her mood subtly changes. She begins to feel annoyed at her hubby, the downright aggrieved; by the next commercial she is howling for his scalp on toast.

This style of consciousness-raising or client education can be applied to virtually any legal problem. Someone walks into the office in a far from combative frame of mind, feeling there is something to be said for both sides, not at all in the right mood for litigation services. The entrepreneur can artfully lay out the full gravity of the other side's conduct. The client who wants help in rescheduling overdue bills can begin to appreciate how irresponsible the banks were to send him so many credit cards. The frightened tenant behind on the rent can realize, the thought coming as if unbidden, that the landlord's delay in repairing the sink is really little short of depravity.

None of this would have surprised old-time lawyers in the least, and it was one reason for the insistence on detachment and passivity that runs through their writings on the lawyer/client relationship. Yes, lawyers were to apprise clients fully of their rights and options, but it was best done clinically, so as not to inflame any latent feelings of fear, rage, envy, or avarice. If the case did proceed to litigation, the client as "master of his suit" was to provide the impetus not only for the initial filing but for any major escalation of the battle. Given a client of lawful intent, the ideal lawyer did not try to shape even his attitudes, let alone his story.

Client Loses Control

If you hire a contingency-fee lawyer you surely know already about the great advantage of giving him a piece of the action: he gets a powerful incentive to bring in the absolutely biggest cash amount. But the absolutely biggest cash amount may not be what you want.

You may not, for example, be feeling angry enough to fire off every arrow in your quiver of legal rights. Maybe it strikes you as a little rough to sue the nurse as well as the doctor and hospital just to get a few dollars more, or to brand your ex-business partner as a racketeer as part of your action seeking a fairer division of the enterprise property. You may not want to pry into the other side's private life or invite prying into your own. Then, too, litigation can end in many ways. The bitterest marital fallings-out have been known to end in a miraculous reconciliation. (Most states still forbid contingency fees for obtaining divorce decrees because they so clearly give the lawyer a reason to sabotage any such development.) A new management might take over at the workplace where you were fired and offer you a job instead of a back-pay settlement. The magazine you sued for libel might print your side of the story. In a University of Iowa study of libel complainants interviewed after their suits were over, by far the majority said they would have been satisfied at least initially with a correction or retraction instead of cash damages.

But, if someone else fronted the money to get you into court, the action is no longer yours alone. You have a new partner in your lawsuit, maybe a senior partner, to whom words of forgiveness butter no parsnips and gestures of mercy pay for no beachfront condos. You will be pushed toward high-ticket strategies, although they may end in hatred or self-reproach.

Timing is a common source of conflict between lawyer and client interests. Most litigants tire of their fights, if not at first, then after a while, and at some point would rather get on with their lives than hold out for a little more. The lawyer with a big war chest has an incentive to make you wait in order to go for the extra money. Every so often the roles are reversed: some clients have complained, and at least one legal-malpractice suit has charged, that lawyers settled too early for a low figure because they needed help with the office cash flow.

Hiring a lawyer on an hourly fee puts you in control of the direction of your affairs, much as taxi fare gives you wide discretion to name your own destination and hop off where you want. The contingency fee take you along for someone else's ride, abroad a high-powered machine typically geared to breaking altitude records. With luck, it might be a ride to riches. But it is best not to complain about the steering. And although you may think you have the right to change lawyers in mid-lawsuit if things get too ugly, just try it.

Costs to Third Parties

There is no denying that contingency fees have certain productivity advantages. Paying people only if their efforts culminate in success definitely coaxes more effort out of them. The question is whether the effort is aimed in the right direction. Much of the economy is run on a fee-for-results basis. Farmers get paid for cabbages based on how many edible cabbages they come up with, not how many hours they spend in the cabbage patch. Realtors and travel agents work on straight commission. So, for that matter, do authors who hope to make royalties past the advance on their books: if the product doesn't sell, they may get to recompense for an extra hundred hours of work.

Not all occupations are like cabbage, house, or book selling. Contingency fees tend to be disfavored in professions to whom the interests of others are helplessly entrusted, where misconduct is hard to monitor. Accountants have long been barred from accepting contingency fees (I'll pay you twice your normal rate if my taxes go down, the bank stays happy and I survive the next annual meeting without being voted out"); we hope they will stay independent enough to tell their clients unwelcome truths. Salesmen are not always paid on commission in part because the hustle factor in salesmanship can be turned in a destructive direction: commissioned salesmen, although they outperform the hourly variety, are also more tempted to use high-pressure sales techniques and manipulative tactics that "make their numbers look good" to the boss.

Contingency fees are particularly frowned on where the costs of abuse fall on third parties who are not taking part voluntarily. Giving traffic cops contingency fees by hinging their bonuses on how many tickets they write arouses widespread anger because it so obviously tempts the officer to be unfair to the motorist. The same is true of giving tax collectors contingency fees by hinging their bonuses on how many deductions they disallow or how many assets they seize. Giving soldiers contingency fees for successful attacks, by letting them loot the towns they capture, was long favored as a way of encouraging warlike zeal, but came under gradual ethical control as civilization progressed; we now give out medals and ribbons instead of the contents of civilian homes.

Dangers for Society

Giving lawyers contingency fees encourages similar abuses of both the client and the public. In the classic underworld injury racket, the operator, after pocketing the defendant's tender of settlement, gives the accident victim whatever pocket change it is thought should satisfy him, or just dumps him back on the street with no money at all. (Any back talk from the victim and his original accident will seem minor in relation to the troubles that await him.) Most clients of today's litigation industry fortunately do not get treated that badly. But many are quite surprised to discover at the end of a suit that the lawyer's claimed "expenses" -- copying, filing costs, expert witness fees, and so forth -- have somehow ballooned to represent a huge share of the settlement on top of the contingency fee itself. Some naive souls never find out how much the defendant paid to settle, but take the lawyer's word for it.

But the dangers of the contingency fee go beyond the exploitation of clients. After all, alert clients can be on guard against being exploited by their own lawyers; as the abuses are more widely publicized, more may learn to avoid the lawyers who get too greedy in bill reckonings. The real problem with the contingency fee derives not so much from the conflicts it creates between the interests of lawyer and client, as from the even more dangerous conflicts between their interests and everyone else's.

In truth, many clients are delighted to find a lawyer who is much more ruthlessly committed to winning than the hourly-fee lawyer who represents their opponent. They seek the operator who knows who to turn a worthless or low-value claim into a cash bonanza even if he keeps most of the extra money for himself. If they are made to cooperate in truth-shading or worse, they are not bothered. Some are only too glad to think up new embellishments on their own.

The case against the contingency fee has always rested on the danger it poses not to the one who pays it, but to the opponent and more widely to justice itself. As other nations recognize, it can yoke lawyer and client in a perfectly harmonious and efficient assault on the general public. The designated opponents are far from the only ones victimized by wrongful or overzealous litigation. Every lawsuit sweeps in third parties who are forced to expend time, energy, and money without compensation, and surrender their privacy by answering under oath the probing questions of a hostile lawyer. The cost to taxpayers of running the system are far from trivial; most broadly, lawsuits tend to paralyze productive initiative by keeping rights in a state of suspense. We all pay for needless litigation.

[End of first part] [Second part of article]

*****

Walter Olson is senior fellow at the Manhattan Institute.  This article is excerpted and adapted, with some new material, from The Litigation Explosion: What Happened When America Unleashed the Lawsuit (E.P. Dutton/Plume). (c) Walter Olson.

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