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DTCI: Counterpoint: Contingency fees require more scrutiny than ever

April 8, 2015

 

Mundrick By Keith D. Mundrick

This article is a response to “Contingency fees still help to provide access to courts,” published as a 25th anniversary feature in last month’s Indiana Lawyer. I initially planned to write about defending insurance agents under a duty-to-advise theory (If you’re curious, no such duty exists except under very specific circumstances, see Cox v. Mayerstein-Burnell Co., Inc. 19 N.E.3d 799 (Ind. Ct. App. 2014)). However, I felt the recent discussion of contingency fees called for a counterpoint.

Civil litigation is not what it was 20 or 30 years ago. Attorney advertising has transformed the personal injury practice, and this change has given rise to a class of high-volume and extraordinarily wealthy plaintiff firms. Yet the arguments for 30- to 40-percent contingent fees remain the same. It is argued, first, they help “victims” access “justice” and second, they provide an incentive for lawyers to accept cases they might lose.

There are cases where those arguments hold water. But there are other circumstances where this logic is specious or even disingenuous. The only time a lawyer truly runs the risk of losing a fee is when a case is tried – less than 10 percent of the time. If the claimant is already sitting on an offer before the representation, there is almost no risk to the lawyer at all. In cases where liability is not disputed, the only question is how big the contingent fee will be. And then there are cases that are clearly worth policy limits, and it is simply a matter of time until those limits are paid.

My objection is not with all contingent fees (and certainly not with all contingency lawyers), but with steep, inflexible contingent fees and their potential side effects: cases that cannot be settled, lawyers who are more invested in litigation than in their clients, and unconscionably high fees when the contingency does not match the work performed. One size does not fit all.

The new landscape of personal injury has also blurred the distinction between civil and criminal contingent fees, the latter of which are almost universally prohibited. Simply put, it is time to rethink the role of contingency fees in Indiana litigation.

Why criminal contingent fees are prohibited

Contingency fees are prohibited in criminal cases for a number of public policy reasons. Ind. R. Prof. Cond. 1.5 (with similar rules in almost every jurisdiction). These concerns have gradually become applicable to civil cases.

One reason for the criminal ban is that contingent fees create an instant conflict of interest between the attorney and his client. If a criminal fee is contingent upon acquittal, the attorney must pursue a complete acquittal to collect his fee, even if the client would be better served by a plea agreement or jury instruction on a lesser offense.

The more common justification of the prohibition is that “such fee arrangements may tempt the advocate to employ improper or corrupt tactics to enhance the fee. … In the administration of criminal justice the stakes are high, and thus the danger of abuse resulting from a contingent fee is especially great.” ABA Criminal Justice Standards 4-3.4 (emphasis added).

Let’s start with the conflict of interest. In many ways, the civil contingent fee creates a greater conflict between lawyer and client than the forbidden criminal contingency. A criminal defense lawyer bears no burden to prove the case and is generally able to avoid the costs that come with prosecuting litigation. On the other hand, a plaintiff’s lawyer does bear the burden, and he can often spend thousands of dollars on expert testimony to establish the scope and causation of damages. This does not even consider the deposition fees, travel expenses and other costs that are typically amassed by both sides. Under some arrangements, these fees are the client’s responsibility, but they are often uncollectable in the absence of a favorable result.

By the time all the facts are established, a personal injury lawyer may have a lot of his own money on the line. At this point, the lawyer shifts from a disinterested advisor into a vested stakeholder in the litigation. The lawyer’s compensation is tied not just to the outcome (as it would be under a criminal contingent fee) but also to the magnitude of the outcome. The higher the verdict, the higher the fee.

What if an offer is made during mediation that the client wants to take, but the lawyer thinks he can beat at trial? Is it harder to give neutral advice on the settlement? What if a conflict of interest arises after the lawyer has already paid for experts and worked up the case? Is there an incentive to improperly keep the case?

This feeds directly into the temptation, as feared by the ABA, to misbehave due to “high stakes.” In criminal law, the “stakes are high” for the client; the lawyer isn’t the one going to jail. In civil litigation these roles are reversed. Here, the stakes are often higher for the lawyer, whose own money is riding on the verdict. In any given trial, the attorney may either lose thousands or make millions.

These “high stakes” keep getting higher, as evidenced by the rise of today’s high-volume personal injury firms. Many lawyers proudly advertise that they have recovered $100 million, $500 million, or more for their clients. You don’t need a calculator to know that 33 percent of $500 million is a lot of money. (Remember the argument that high contingency fees are necessary to incentivize lawyers to accept cases?)

Controlling the calculation of damages

The ABA’s fears about criminal lawyers using improper tactics to increase the contingent fee are manifesting in civil litigation. One example is lawyer-referred medical treatment and the temptation to manipulate special damages.

Personal injury cases are often evaluated based on some multiplier of the claimant’s medical bills. This can be a popular approach in negotiations, a starting point at mediation, or even the basis for a plaintiff’s closing argument. Contingency fee lawyers may be tempted to take control of this number by sending their clients to additional providers to eventually generate a higher verdict or settlement amount (and contingent fee). This is unfair to the client, who can be saddled with liens for dubious chiropractic or massage treatment, and it is unfair to the defendant, who is asked to pay for it. If a client feels that he is still in pain after completing treatment, it is his doctor’s job to make a referral.

The popularity of the “multiplier” approach has made it very important to start with an accurate number. In last month’s article on contingent fees, Stanley v. Walker was characterized as “chipping away” at the contingent fee structure (This is the case which permits evidence of discounts or write-offs to be presented alongside medical bills.). Stanley simply allows a jury to decide that an arbitrary “billed” amount, which nobody ever paid, is an inaccurate measure of damages. (If you buy a $1,200 television on sale for $700 and the employee drops it, try convincing the store that it owes you $1,200.)

Attacking the insurance industry

Another side effect of contingent fees is the relentless campaign against insurers, mostly waged through personal injury advertising. The message is consistent: Whatever you’ve been offered is unreasonable, and Lawyer X will help you “fight the insurance company” (in exchange for 33 percent of your recovery).

For lawyers who engage in this practice, there are two clear benefits. First, it uses alarmism to make claimants think that they need a lawyer. Second, it perpetuates the myth that the insurance company is the boogeyman hiding in your kids’ closet – a very profitable myth for some firms. Each commercial is an investment, not just in getting clients to call, but also in shaping future juries and their perception of insurers. It also gets the public thinking in terms of “victims” and “insurance companies,” rather than plaintiffs and defendants. (Have you ever heard the word “defendant” in an attorney advertisement?) The current Marion County juror questionnaire even has a section prominently titled, “Your Experience with Insurance Companies and Lawsuits.”

This campaign has produced some truly remarkable advertisements. In one local commercial, a boxer repeatedly punches an insurance adjuster who is trying to get away, eventually leaving him unconscious on the ground. (“We fight insurance companies. That’s what we do.”) Another ad shows a knight wielding a sword and shield, while the narrator talks about times that “separate the wicked from the just.” Others depict insurance adjusters in their palatial offices, openly conspiring to commit fraud until they learn Lawyer X was retained.

The lawyers on TV are the lawyers the public sees most often. What does this kind of advertising do to our profession?

Fees that don’t fit the case

Another troubling byproduct of contingent litigation is the legal fee that fails to match work performed or fees that dwarf the client’s actual recovery. Cases come in all shapes and sizes. Some matters need to be appealed to the Supreme Court, and some require only a few phone calls to settle. Even flexible contingent rates (such as 25 percent if settled, 33 percent if tried and 40 percent if appealed) produce many unreasonable outcomes, given the wide variety of labor needed to resolve a lawsuit. A claim with $60,000 in damages does not necessarily take twice as much work as a case with $30,000 in damages, and an undisputed claim that quickly settles for a $100,000 policy does not warrant a $33,000 fee.

Inflexible contingent fees are also a roadblock to settlement. If negotiations are taking place under a comparative fault assumption, the lawyer might need to cut his fee for settlement to be realistic. Not everybody is willing to do this. Sometimes, the contingent fee is just the beginning, as Prof. R. 1.5(c) allows costs to be taken before or after the contingency is assessed. Mileage, mediation fees, deposition transcripts and other costs are sometimes stacked on top of the 30 to 40 percent, making negotiations even more difficult.

Some fees can result in the lawyer going home with more money than his client. In personal injury litigation, this may be the result of a few stubborn liens, but class actions push this concept to the extreme. In cases where each class member suffered minimal damages, massive legal fees sometimes question the true value of such litigation.

Last year, a California firm sued Jimmy John’s on behalf of any and all patrons who “purchased sandwiches advertised in online and in-store menus, among other places, as including sprouts, which did not in fact include sprouts.” Starks v. Jimmy John’s LLC, Case No. BC501113 (Cal. Sup. Ct. Los Angeles 2014). The settlement provided $370,000 in attorney fees, while the class members each received a free pickle as compensation. (In full disclosure, Jimmy John’s also agreed “to cease and desist from advertising or otherwise representing that any of its sandwiches include sprouts if they in fact do not include sprouts.”)

These results are widely criticized by the press, academia and even the judiciary. Judge Richard Posner wrote in a published opinion that such class actions present a “much greater conflict of interest between the members of the class and the class lawyers than there is between an individual client and his lawyer. The class members are interested in relief for the class but the lawyers are interested in their fees, and class members’ stakes in the litigation are too small to motivate them to supervise the lawyers in an effort to make sure that the lawyers will act in their best interest.” Thurgood v. Sears, Roebuck & Co., 547 F.3d 742, 744 (7th Cir. 2008).

Potential solutions

Indiana generally does not limit contingency rates, the exception being medical malpractice claims. This needs to change, and other states have found excellent compromises.

Wyoming has a sliding scale for permissible contingent fees, with a separate cap on claims settled within 60 days of filing a lawsuit. Wyo. Ct. Rules. Ann., Contingent Fee R. 5. Washington allows for judicial review of the reasonableness of a contingent fee at the request of either party. Wash. Rev. Code § 7.70.070. New Hampshire requires court approval of any contingent fee that exceeds $200,000. N.H. Rev. Stat. Ann. § 508:4. The Connecticut sliding scale has a cap of 33.3 percent of the first $300,000, 20 percent of the next $300,000, 15 percent of the next $300,000, and 10 percent above $1.2 million. Conn. Gen. Stat. § 52.251.

Another solution is an hourly/contingency hybrid, where lawyers record their time and paralegal time at a rate that reflects the risk undertaken. For instance, a lawyer might charge twice the average rate in Indianapolis, but the collection of that fee would be purely contingent.

Closing comments

This article is not meant as a repudiation of attorneys who practice on a contingency basis. I have, of course, worked with many Indiana practitioners who strive to do right by their clients. My point is simply that contingency fees, without limitations, can incentivize conduct that damages the parties, the profession and the public.

I challenge the notion that these fees are necessary to promote access to justice, especially in light of their side effects. Other states are finding creative solutions. It is time for Indiana to do the same.•

Mr. Mundrick is an attorney with Cantrell Strenski & Mehringer LLP, where he defends businesses and insurers at all stages of state and federal litigation. He also serves as vice-chair of the DTCI Insurance Coverage Section. The opinions expressed are those of the author.

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