The Mission of the Manhattan Institute is
to develop and disseminate new ideas that
foster greater economic choice and
individual responsibility.

Civil Justice Memo
No. 24 February 1996


Taming the Litigators: Why Not More Disclosure?

by Walter Olson

Walter Olson, a senior fellow at the Manhattan Institute and author of The Litigation Explosion, has been completing a book on employment law for the Free Press.

American lawyers wield more fearsome powers than lawyers in any other country. They can drag their fellow citizens into years of expensive legal process; compel disclosure under oath of their most personal papers and opinions; and submit those opponents' past actions, cast in the worst light, to the mercies of a jury that may award unbounded punitive damages on the basis of guesswork or emotion. Lacking a "loserpays" rule, we put no price tag on the use of these threats against an opponent who turns out to be innocent.

Why do we give litigators so much power and provide so little control over how they use it? One popular answer, at least among the bar, is that we thereby advance not just the interests of the lawyers and their clients but the public interest. Just like the coercive power of a regulatory agency or a public prosecutor, the force of litigation can expose and punish risky or unethical conduct, thus benefiting society at large. It's called the theory of the "private attorney general".

But this theory suffers from at least one glaring gap. It comes on the matter of disclosure.

In the case of actual public prosecutors and regulatory agencies, we feel entitled to a close public accounting of how much they're spending and what they're accomplishing. We want to know how much each official is making personally and which private contractors are getting big subsidies. We expect the prosecutor or threeletter agency to make public the details of its wins, losses and settled cases, so that abuses of public power can be exposed to public scrutiny.

At the federal level, at least, we have indeed gone to some length to make sure lawmakers and interested citizens can get this sort of information. We've passed freedom-of-information, open records and sunshine laws; agencies must file regular reports and are subject to legislative investigations in which they're expected to yield with a good grace to lawmakers' demands for information.

Many entirely private enterprises are subject to mandatory disclosure too, especially when their activities are felt to be charged with some public interest: banks, airlines, utilities, hospitals, and many more. Securities law is a catchall that forces most other large enterprises to cough up salient information, including balance sheets, income data, and executive salaries. Naturally, disclosure is likely to be more rigorous in "privatization" situations where an enterprise carries on some activity that's long been considered intertwined with government functions. If a forprofit firefighting company starts breaking into unoccupied homes that weren't on fire, it won't have much luck turning back questions with the argument that it is, after all, a purely private entity and does not have to explain its decisions to anybody.

Finally, standard government data collection fills in many details about the size and growth of private industries. Numbers from the Census Bureau, Commerce Department and Bureau of Labor Statistics can often help reveal the extent of social trends and problems.

But when it comes to the doings of the litigation business, the general rule is one of secrecy.

Attorney-client privilege, like the Cone of Silence on the old "Get Smart," shields lawyers' offices from scrutiny. Indeed, a trick of the trade is that in a wide range of touchy situations the only way to secure privacy from the law's nosy intrusions is to route doubtful activity through a lawyer's office and stamp it as "work product". Retainer agreements fall under jealously guarded secrecy, and most litigation ends in settlements to whose terms the public is never made privy.

Official data collection about the litigation business is almost eerily sparse. No one collects aggregate numbers, or even representative Census samples, on the flow of money redistributed by litigation; the closest thing are figures on numbers of cases filed, which count a supermarket slipandfall as if it were the same as a billiondollar class action, and are thus laughably unreliable as any proxy for the economic impact of suing. The exceptions are mostly accidental: thus we happen to possess startling numbers on the rise of medical malpractice payouts in New York (up 300fold, or 30,000 percent, in thirty years), but Albany collected the data because it wanted to regulate malpractice insurers, not because anyone felt responsible for keeping tabs on litigation as such.

The upshot is that we know less about the workings of the litigation sector than we do about almost any domestic undertaking of comparable economic significance. We can monitor the ups and downs of machine tool sales to within a percentage point, but we have no real idea whether the sums redistributed by compulsory process last year rose by 9 percent, fell by I percent, or did something in between. We can recite last year's incomes for sports figures, photo models and Hollywood comeback artists, but we can't say for sure whether it took $10 million or $40 million in fee income to make it into the top ten list of Texas litigators. We know much more about the standard contracts and fee policies that rentacar companies use in dealing with their transient customers than about those used by law firms, though legal fees eat up a huge share of the future assets of many persons caught up in litigation.

All this nondisclosure is not by accident. It's by design. Lawyers write our laws or influence those who do, and their policy has been consistent from way back: require disclosure from everyone else, but hold their own doings private. They switch neatly back and forth: litigation is something charged with the widest public significance when it comes to justifying high damage awards or tough discovery powers, but the whole business gets redefined as cozily private, no one's business but their clients', when anyone starts asking questions about what goes on in their own chambers.

The resulting ills are many. Because we exempt the litigation business from ordinarily expected kinds of disclosure, we make it easier for lawyers to exploit both their clients and their opponents; we deprive judges and juries of material facts that might lead them to discount arguments or put lawyers' conduct in perspective; we insulate disciplinary panels from evidence of lawyer misconduct; we prevent scholars from reaching agreement on the size or growth of the litigation sector; and we keep lawmakers and the public in the dark about abuses, thus retarding efforts to reform the system.

Start with client victimization. The Federal Trade Commission and kindred agencies have put out vast regulations to make sure doortodoor vacuum salesmen and smallloan financiers disclose vital data to prospective customers before closing a sale. Yet no one requires such disclosure when litigators guide bewildered firsttime clients into what are often the biggest financial transactions of their lives.

    The lure of obtaining a fraction of.. handsome sums has caused most trial lawyers to insist on contingency fee arrangements, even if their clients can afford to pay the normal hourly rate .... There is little bargaining over the terms of the contingent fee. Most plaintiffs do not know whether they have a strong case, and rare is the lawyer who will inform them (and agree to a lower percentage of the take) when they happen to have an extremely high probability of winning. In most instances, therefore, the contingent fee is a standard rate that seldom varies with the size of a likely settlement or the odds of prevailing in court.

Thus observes former Harvard president and law school dean Derek Bok in his 1993 The Cost of Talent. Lester Brickman of Cardozo Law School has argued that disclosure is crucial in curing these ills; if a lawyer is made to explain at each step how much work has actually been done, clients will better detect when they've been imposed upon. Lawyers who advertise "no fee unless successful", Brickman notes, often fail to disclose that if customers try to switch lawyers in midaction they may owe a hefty fee (in quantuin meruit) even if they eventually lose the case. They also often fail to apprise clients of fee-splitting deals in which they agree to hand over a large share of their percentage fee (as much as half) to the lawyer who referred them the business; disclosure of such kickbacks might help alert clients to high margins and opportunities to negotiate fees downward.

Courts have likewise been slow to come to grips with many disclosure problems posed by class actions. Bay Area attorney Lawrence Schonbrun has battled for years to overcome the tendency of settlements to keep secret such matters as where fees are coming from and which lawyers will get them, and the extent to which actual payouts from common funds correspond with original projections on which courts based their approval of a settlement.

Fuller information about lawyers—their finances, methods of client recruitment and witness preparation—would also be of keen interest to many judges and juries. Current trial practice already encourages questioning expert witnesses on financial emoluments that might cloud their judgment. Yet exactly such emoluments can cloud the opinions of the lawyers who are even more central in the persuading. In understanding why an attorney construing his opponent's conduct seems to be steering them toward liability theory A and away from equally damning liability theory B, for example, jurors might find it helpful to know that theory A but not theory B triggers a statutory fee entitlement to the prevailing attorney. Increasingly, defense as well as plaintiff's lawyers are accepting contingent fees; jurors might find it valuable to learn which lawyers are arguing on this basis, just as they benefit by knowing whether an investment advisor or car salesman is receiving a commission or operating on flat salary.

Then there's the need for overall data collection. In recent years defenders of the litigation industry have selectively cited data from various sources by way of arguing that the industry's activities have plateaued: the litigation boom, they argue, is correcting itself. Are they right? Lawmakers should take care that in an era of limited data budgets they do not wind up paying for a whitewash. The American Bar Association and academic commentators who've consistently minimized concern over litigation have been positioning themselves to supply the personnel and marching orders for data collection efforts if Congress is unwary enough to let them. If the foxes are allowed to set up the video cameras in front of the coops, it is fairly certain that the tape will not catch them doing any fowlsnatching.

One big step forward is a push in Congress for Form 1099 reporting of lawyers' contingency income (law salaries and consulting fees are already subject to reporting). Although one might assume attorneys would have a very high rate of tax compliance given their familiarity with the law, the IRS's Project Esquire found otherwise: around 10 percent did not even file returns.

As legal reform proceeds, expect more proposals for fuller disclosure. One important measure is S. 300, sponsored by Senators Spence Abraham (RMich.) and Mitch McConnell (RKy.). Disclosure is a central tenet of its "earlyoffer" provisions which seek to aid clients by identifying for their benefit how much of a settlement offer is "on the table" and how much of any claim therefore remains in dispute.

Better disclosure of the operations and growth of the litigation industry will furnish new raw material for reformist energy. It will make it easier, for example, for antitrust investigators to reach an informed judgment as to whether conscious parallelism in the setting of fees is consistent with current federal law. It will reveal patterns of abuse that could help energize bar and statecourt disciplinary panels, now often derided as toothless. It will help resolve policy debates about the size and growth of the litigation sector. And it will also increase the amount of rough justice in the world—since those who live by extracting disclosures from others can hardly object if they're asked to start making disclosures of their own.

 


Center for Legal Policy.

EMAIL THIS | PRINTER FRIENDLY

 


Home | About MI | Scholars | Publications | Books | Links | Contact MI
City Journal | CAU | CCI | CEPE | CLP | CMP | CRD | ECNY
Thank you for visiting us.
To receive a General Information Packet, please email support@manhattan-institute.org
and include your name and address in your e-mail message.
Copyright © 2009 Manhattan Institute for Policy Research, Inc. All rights reserved.
52 Vanderbilt Avenue, New York, N.Y. 10017
phone (212) 599-7000 / fax (212) 599-3494