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)

[This is part two of a two-part article.] [To first part]

Enthusiastic First Resort

The most common justification for the contingency fee is that it provides the "key to the courthouse" for people of modest means. But injury lawyers tend to oppose the method all other countries use to provide that key: an hourly fee paid by the losing opponent. And it turns out that they happily charge contingency fees to middle- and upper-income clients who could easily afford to pay on an hourly basis.

In fact, mysteriously, the contingency fee has become the only way most clients can get a lawyer for injury cases, even if they would rather pay an hourly fee. Some clients suspect that a phone call or two from a lawyer, or a letter on his stationery, may be all they need to get a satisfactory resolution to their problem. They might feel that giving their lawyer a third of the amount won in such a case would be an undeserved windfall. But they are out of luck. A report from the Federal Trade Commission showed that 97 percent of lawyers took injury cases only on contingency, refusing to consider hourly rates, however generous. Lawyers seem to have come to the conclusion that a good injury case is a plum and, damn it, they have a right to a share, as befits a player. They are also loath to undercut the "going rate" fee percentage, even when success in a case seems virtually assured. In some of the rougher towns like Detroit and Kansas City the going rates over the years have been reported to run at 40 and even 50 percent.

As lawyers have discovered how very profitable this kind of practice can be, more of them have gotten over their scruples. The contingency fee is coming to be seen as the basis of an industry boldly and openly run for profit, as an enthusiastic first resort for the general case rather than a trouble last resort for the special. And in a trend that is full of implications for the future, the fee is spreading to litigation over employment matters, child support, will contests, copyrights, taxes, and, perhaps most ominously, divorces.

In Texas, where the contingency-fee industry is unusually well developed, it is having a profound effect on commercial litigation. Texas lawyer John O'Quinn may represent a one-man wave of the future. His full-page Yellow Pages ad, as quoted in a Wall Street Journal report, says he is dedicated to "helping injured people obtain cash damages" and promises an "attorney on call 24 hours a day." State bar officials have accused him of using runners to acquire injury cases. What makes O'Quinn an interesting and apparently a very, very rich man is that he also applies his personal injury case methods -- appealing to populist resentment -- to otherwise routine disputes between businesses, with astonishing success. His most startling victory came in 1988 when a jury awarded $ 600 million to one of his clients, an Ohio natural-gas producer, in a contract dispute with the giant Tenneco Corporation.

A Professional's Obligations

For centuries the practices of law, medicine, accounting, pharmacy, and other professions have been seen as fundamentally different from those of, say, agriculture, metalworking, and clothes-making, not because the former pursuits are more important or difficult, but because they pose special dangers of abuse and unethical conduct. Professionals face distinctive ethical responsibilities that would be unnecessary and indeed wrongheaded to impose on other persons. These responsibilities have gradually crystallized in the form of long-evolved codes of professional ethics.

A typical tenet of these codes is that a professional practice should not be run purely "as a business." Ethical codes commonly require members to charge per-hour fees rather than contingency fees based on a client's satisfaction or success. Even more common are rules restricting the gung-ho "chasing" of business through advertising and more direct promotional methods. Such rules plainly curb competition, and many free-market supporters have denounced them as advancing a profession's collective interest at the expense of society's. Critics have cheered over the last 15 years as professions have been forced to relax or abandon their former ethical rules, under pressure from antitrust suits and adverse court decisions.

The case against untrammeled professional competition is seldom heard at length these days, but should not be dismissed lightly. It proceeds from the observation that competition tends to stimulate output of a service and tailor it more closely to what customers want. These normally innocuous results can be problematic in a professional context.

Consider first the stimulation of output. Overselling -- the hustling of customers to buy things they would probably do better without -- is perhaps a venial offense in the selling of home freezers and encyclopedias, but somewhat more ominous when applied to amphetamine pills and divorces. Auto salesmen are free to encourage impulse buying of sports cars, but surgeons may have a duty to discourage unnecessary surgery.

Perhaps, lest we fall into paternalism, it is best to recognize the client's right to be self-destructive. Trouble is, many dubious professional services harm someone other than the one who pays for them. A great deal of medicine is practiced on infants or on feeble or unconscious persons at the (perhaps misguided) behest of family members and others. There is likewise a steady market for faked medical reports, forged prescriptions, and undeserved audit opinions, all of which facilitate fraud aimed at third parties. The unethical doctor or accountant, far from being shunned by clients, may be in hot demand -- which may be one reason to shield both professions from too strong a financial incentive to give clients what pleases them.

Of course the deliberate insulation of producers from consumer sovereignty is a dangerous thing. It seems likely that many of the old bans -- on price advertising by druggists and opticians, for example -- were of little importance in curbing abuse and did badly undercut market efficiency. We may also wish on libertarian grounds to uphold an individual's right to offer services to consenting clients even if the consequence is to expose third parties to hard-to-detect abuse. But however strong the case may be for deregulating the practice of medicine and accounting -- while, one hopes, allowing outraged colleagues to shun the maverick, which our antitrust laws currently forbid them to do -- there is no case at all for extending the principle to the practice of law.

Lawyers are delegated certain quasi-governmental powers to invoke compulsory process. In particular, they can initiate lawsuits that impose huge unrecompensed costs on what frequently turn out to be innocent opponents. As we know from the case of pollution, the opportunity to impose costs on other people is likely to be overused unless it is regulated or priced in some way. In no way does it violate individual rights to demand of those who seek to wield this coercive power that they submit in exchange to certain rules to prevent its overuse.

[end of article] [To first part]

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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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