May 25, 2000
Excessive Legal Fees: Protecting Unsophisticated Consumers, Class Action Members, and Taxpayers
The legal and popular press have followed an intense debate driven by concerns that many consumers of legal services are being charged excessive (sometimes outrageous) legal fees without their consent…either because they are not direct parties to a lawyer-client contract (class action members and taxpayers who pay the fees for government actions) or because they lack the knowledge and experience to negotiate a fair fee. The debate is fueled by the counterpoint denials that such problems exist. The Manhattan Institute Center for Legal Policy, The U.S. Chamber of Commerce Institute for Legal Reform, The Hudson Institute and The Federalist Society joined together to sponsor a one-day conference to discuss the issues.
In the early years of the practice of law in the U.S. contingency fees were prohibited based on the premise that a lawyer who is paid a percentage of a tort recovery ceases to be just an advocate and inappropriately becomes a self-interested party to the suit. Contingency fees first came into existence in the United States in 1848 when the New York State legislature, moved by a desire to provide victims of industrial accidents with ready access to the courts, repealed the state’s statutes regulating lawyer’s fees and opened the door for lawyers to become direct stakeholders in litigation.
In a 1994 Manhattan Institute publication, Rethinking Contingency Fees, Lester Brickman, Michael Horowitz, and Jeffrey O’Connell documented that contingency fee lawyers routinely charge one-third to one-half of plaintiff recoveries (often calculated from gross recoveries) effecting fees that they estimate to be from “$1,000 to $5,000 to as high as $25,000 to $30,000 per hour.” These effective hourly rates are particularly problematic when they exist in a case where liability was quickly conceded and settlement activity consisted of a few letters and calls to the defendant to reach agreement on the amount of the damages.
There is some general public awareness of the problem. A 1995 survey published in U.S. News and World Report disclosed that 56 percent of the American public believe that lawyers use the system to protect the powerful and enrich themselves.1
Lawyers are prohibited from charging excessive fees by state ethics codes, most of which are patterned after the American Bar Association’s Model Rules of Professional Conduct. The current ABA Rule 1.5 (a) is as follows:
A lawyer’s fee shall be reasonable. The factors in the current model rule to be considered in determining the reasonableness of a fee include the following:
- the time and labor required, the novelty and difficulty of the questions involved, and the skill requisite to perform the legal service properly;
- the likelihood, if apparent to the client, that the acceptance of the particular employment will preclude other employment by the lawyer;
- the fee customarily charged in the locality for similar legal services;
- the amount involved and the results obtained;
- the time limitations imposed by the client or by the circumstances;
- the nature and length of the professional relationship with the client;
- the experience, reputation, and ability of the lawyer or lawyers performing the services.
There is general agreement that these rules are rarely if ever enforced. An exception: In 1998 a Colorado appeals court upheld a lower court’s decision allowing a retired hospital orderly to win back the standard percentage her lawyer took for representing her after an automobile accident in which she was seriously injured by a drunk driver. The case involved little lawyer time; it was a simple matter of collecting on a $100,000 uninsured-motorist policy that the plaintiff carried.2 But, cases like this are isolated events in what many describe as a sea of abuses. Former Chief Justice Burger, a harsh critic of the legal profession’s failure to live up to its ethical obligations noted: “Lawyers have a way of papering their profession with ‘rules’ which are advisory, vague, and widely ignored.”3 Many of the panelists at this conference echoed the view that the state progeny of ABA Model Rule 1.5 are ignored.
In 1997 the ABA created the Ethics 2000 Commission, a 13 member body that is recommending changes in the Model Rules of Professional Conduct that will go before the ABA House of Delegates this summer in Chicago, Illinois. The changes recommended in Rule 1.5 (a) are 1) that the opening statement should be rephrased to assert “A lawyer shall not make an agreement for, charge, or collect an unreasonable fee or an unreasonable amount for expenses,” and 2) a factor #8, “the degree of risk assumed by the lawyer” should be added.
The good news is that the American Bar Association is recognizing that the degree of risk a lawyer is taking should be a factor in determining the fee. The bad news is that tinkering with the language of a rule that is rarely enforced has questionable value. HALT, a highly regarded nonprofit organization of over 70,000 individual contributors that has as its mission to change the legal system to make it more equitable and affordable for the average citizen has an article in its Winter 2001 newsletter on the ABA proposed rule change. HALT describes the Ethics 2001 Commission as a “resounding waste of time.” Their point is that “The strongest ethics rules in the world are worthless if consumers don’t know about them. Yet nowhere in the hundreds of pages of new rules is there any requirement that lawyers provide clients any information about their ethical responsibilities.”
What follows is a discussion by judges, practicing lawyers, legal scholars, and a representative of the ABA of excessive contingency fees.
PANEL 1: The Scope of the Problem and Responses by the Judiciary and Bar
This panel opened with Professor Lester Brickman, Cardozo Law School, staking out the position that excessive fees are a considerable problem, and that the financial incentive for bringing contingency fee claims “overwhelms all fiduciary, ethical and public policy considerations.” Professor Brickman is particularly concerned about the use of standard contingency fees in cases where liability is clear and damages are substantial.
In 1994, the ABA Committee on Ethics and Professional Responsibility issued Formal Opinion 94-389. This Opinion deals with the ethical issues raised by tort lawyers charging standard contingency fees of 1/3 to 50% even in cases where liability is clear, damages are substantial, and the lawyer knew at the outset that she, in all likelihood, would earn windfall fees of thousands of dollars an hour. The Committee gave ringing endorsement to the practice of defrauding clients by vastly over charging them in these situations. Elsewhere, I have characterized the Committee’s opinion as wrong as a matter of ethics law, malevolent as a matter of public policy, disingenuous in its presentation, unfounded in its critical assumptions, illegitimate in its rejection of ethical considerations in favor of political partisanship, and blatantly self interested in elevating lawyers’ self interests above their traditional fiduciary obligations to clients. (Editor’s note: this opinion was authored by co-panelist Larry Fox.)
Professor Brickman was one of many panelists to assert that the rules of professional conduct regarding excessive fees are not enforced.
Panelist Larry Fox, Drinker, Biddle & Reath, defended the use of contingency fees as the means to access the courts for claims that would not otherwise be litigated. Mr. Fox admitted that overreaching does exist. He emphasized, however, that the client’s interest and lawyer’s interest are perfectly aligned, both benefiting from as large a recovery as possible. He defended ABA Formal Opinion 94-389 on the grounds that early settlement offers are often “insultingly low” and do not remain on the table, so lawyers are justified in assessing a fee on the full recovery, not just on what was earned above and beyond the early offer.
Mr. Fox agreed with Professor Brickman that Rule 1.5 is not enforced. He rejects legislative remedies, however, which he believes would deprive lawyers of their professional independence.
Last, Mr. Fox drew an analogy between the fee a lawyer receives and the salary a corporate CEO receives.
Here I sit in the capital of free enterprise, the United States Chamber of Commerce building, in a country devoted to capitalism. Does anybody ever figure out what a CEO’s salary is on an hourly basis? Do we care that Cindy Crawford gets paid $100,000 for half a day’s work? No. We make a decision that the economic impact of certain people’s activities is worth the money.
The final panelist, the Honorable Thomas Griesa, U.S. District Court, Southern District of New York, indicated that he has no authority at all over fees.
If a private party, corporation or individual, brings a lawsuit in my court, I have no authority to deal with this question. I say this having never looked up the law; the issue just doesn’t arise. Whatever arrangement has been made between the plaintiff and the plaintiff’s lawyer and the defendant and the defendant’s lawyer has been made entirely without my participation or knowledge.
Speaking about class actions, where the courts do have a role in determining fees, Judge Griesa cited a case—Goldberger vs. Integrated Resources—where a trial judge awarded 4% of a recovery and the Second Circuit gave a very strong endorsement of the moderate fee award. He believes this case indicates that courts are trying to curb the excesses in class action fees.
In the question and answer period moderator Stuart Taylor referred back to Mr. Fox’s analogy between the lawyer and the entrepreneur. Mr. Taylor raised the question whether there is something different about lawyers that demands that we treat them differently. Professor Brickman responded that one of the requirements of the self-regulatory system of the legal profession is that fees are reasonable. He notes that for four or five hundred years in Anglo-American law fees have been regulated. He argues that if the profession is to remain self-regulated, the rules should have some real world impact. Mr. Fox supported better enforcement of the rules, although he defended the analogy to the free enterprise system when the circumstances involve a highly sophisticated consumer of legal services and a highly sophisticated lawyer.
PANEL 2: Fees in Traditional Litigation: A New Reform Proposal
In this panel Professor Richard Painter, University of Illinois Law School, and Jim Wootton, President of the U.S. Chamber Institute for Legal Reform offered up a proposal for contingency fee reform that was conceived by Mr. Wootton and further developed by Professor Painter. The intent of the proposal is to correct the imbalance in information that often exists between lawyer and client. Clients inexperienced in the law are not in a good position to comparison shop; where there isn’t good information markets do not work. The proposal, The New American Rule, bridges the information gap with minimal market interference. The centerpiece of the proposal is a requirement that every contingency fee lawyer offer the client both a percentage fee and an hourly rate. In other words, the lawyer says: I charge X% as a contingent fee, but this fee will not go above $Y an hour. At the end of the litigation, the client chooses which to pay, presumably selecting the lesser amount. The rule also has several features that enhance disclosure, such as an up front non binding time estimate, disclosure of fees charged in similar cases, and monthly statements of hours spent on the case.
PANEL 3: Fees in High Stakes Litigation: Class Actions and Suits by Government Agencies
The panel was opened by the Honorable Vaughn Walker, U.S. District Court, Northern District of California. Beginning with a reference to common fund cases, where attorney fee awards are predicated upon the equitable doctrine against unjust enrichment, Judge Walker noted that in America the doctrine has “been turned on its head.”
The notion here is that the class bringing an action should not be unjustly enriched at the expense of the lawyer. It is a rather peculiar doctrine to apply in a situation where we are attempting to come up with a reasonable way to compensate lawyers for what is essentially an entrepreneurial activity; that is, to compensate lawyers for creating some benefit to the class. It’s rather like attempting to come up with a gratuity rule for good Samaritans. It does not fit the problem at hand.
Judge Walker explained the various methods for determining fees today and noted that all the methods “essentially amount to the same thing: a standardless method of determining fees.” The problem, as he sees it, stems from the fact the fees are not determined in an adversarial context. Fees are determined at the end of the case, when a settlement is on the table, after the risk has passed. He concludes that an ex ante bidding process to determine fees in class actions promotes competition.
Professor Roger Cramton, Cornell University Law School, focused his remarks on: 1) the asymmetry in the tobacco litigation that has shifted from the defendants having an advantage to the plaintiffs having an advantage, 2) the class action as a clientless activity for lawyers and the implications of that fact, and 3) the reality that judges are self-interested actors in the class action context whose major desire is to dispose of cases. On the last point he commented:
Empirical studies show that over 90% of class action settlements are approved by federal courts, and an even higher percentage by state courts after so-called fairness hearings that often last 20 or 30 minutes. There are rarely any objecting parties who contest these settlements. The only information the judge has is the information given to him by the settling parties, who have no obligation to be candid about the fee allocation between the various lawyers, the deficiencies in the settlement, conflicts of interest involved, or what goes into calculating the fee. By and large, judges do not go out of their way to ask hard questions or pursue possible problems.
The next panelist, Professor Charles Silver, University of Texas Law School, maintained that “there is no rigorous empirical evidence that attorneys are frequently overpaid in private representations, class actions or state tobacco cases.” He further asserted that there is some evidence that attorneys who handle class actions are often underpaid.
As to fees for contingency fee lawyers and individual representation he notes:
Contingency fee lawyers take risks that guaranteed-hourly-rate lawyers do not take. Consequently, they earn somewhat more than those lawyers. That means the market is working the way it should. We should not expect to see them earning exactly what other lawyers earn because they’re not delivering the exact same services that other lawyers are delivering.
He sees class action lawyers under-compensated, however:
The most significant problem we have in class action litigation today is not over, but under-compensation of lawyers, as well as a failure to tie lawyers’ compensation to the risks that they incur in these cases. Why do we have this problem? Because everybody thinks about fees in terms of legal ethics. Fees in class actions have nothing to do with legal ethics and are not governed by ethical principles. Class actions are about due process of law, not legal ethics.
Professor Silver believes that fees in class actions should be used to encourage lawyers to maximize the recoveries of class members. “If it turns out that you have to pay the lawyer $100,000 an hour to overcome risk aversion, do it. That’s what due process requires.” He further maintains that judges routinely ignore state bar ethics rules when managing class actions because they too believe class actions are not about ethics but about due process.
The next panelist, Michael Horowitz, Director of the Project for Civil Justice Reform at the Hudson Institute, countered Professor Silver’s remarks by describing the fee debate as one where there is “the rhetoric of ethical regulation and fiduciary duty, and the reality, thanks in part to Charlie’s efforts, to an almost complete (and increasing) real-world breakdown of enforceable ethical norms. We have busy judges who don’t want to get involved in fee regulation and who find it easier, as Roger Cramton has pointed out, to award or endorse flat percentage fees. In the case of attorneys’ fees, we have thus moved away from any semblance of regulation into the brave new unregulated world that Charlie posits.”
The next panelist, Robert Peck, Senior Director of Legal Affairs, Association of Trial Lawyers of America, asserted that the majority of ATLA members do not make what a first year associate makes in a Washington DC law firm, but make less than $100,000 a year. He maintained that although many members charge less, the typical contingency fee is 33% and represents a market rate that considers the compensation due an attorney, the contingent nature of the litigation, the investment made by the attorney by advancing costs, the inherent risk of non-payment or underpayment, the quality of the attorney’s work and the result achieved.
As to fees in class action cases, he disagrees with Professor Silver and asserts that courts have increasingly been exercising their authority to police fees.
The final panelist, Boyden Gray, Wilmer, Cutler & Pickering, hailed the virtues of Judge Walker’s fee auction innovation indicating that the LIABA did a study called “Turning the Tables”, which looked at the results of auctioning off lead class roles. “The article and the study upon which it is based showed that auctions tend to bring the contingency fee down to 7%. This is a two-thirds reduction from the sort of ordinary 20% that I think one gets in the big cases—not thirty three: it’s really probably more like 20–21%.”
The Scope of the Problem and Responses by the Judiciary and Bar
- Mr. Stuart Taylor, Senior Writer, National Journal
- Professor Lester Brickman, Benjamin N. Cardozo Law School
- Mr. Lawrence Fox, Partner, Drinker, Biddle & Reath
- The Honorable Thomas Griesa, U.S. District Court, Southern District of New York, 2nd Circuit
MR. STUART TAYLOR: This panel will consider the scope of the fees problem, if any, and responses to it by the judiciary and the bar. I’d like the panelists to consider, for instance, whether Peter Angelos should get a billion dollar/25% contingency fee for joining in as a free rider to the tobacco settlement at the tail end of a process that was started by others. Perhaps he should be rewarded for pushing a bill through the legislature that rigged the case. Perhaps brilliant legal entrepreneurship should be rewarded just as Bill Gates is rewarded. Should you get $100,000 an hour—as some of the tobacco lawyers are reportedly making—if you hit it big on a contingent case? Should you get a third of a three million dollar verdict if it cuts into your quadriplegic client’s award?
I should acknowledge certain conflicts of interest I have as the moderator. First, I’ve been a fellow traveler of the panelist who might take the dimmest view of Mr. Angelos and his trial lawyer friends. Second, I was the beneficiary this year of at least three class action suits. This has modified my perspective. I have a Toshiba laptop computer with a problem in its floppy disk controller. I am going to get $309.90 if I spend a few hours filling out the legal papers. My lawyer is going to get $147.5 million since there are a few million of us getting the $309.90. Another action I am involved in concerns something called “call options”. I am suing one of my best friends, who happens to be a member of the board—or was a member of the board—before it went belly up. I am also suing my former cell phone provider.
The three panelists include two renowned experts on the subject, Professor Lester Brickman and Lawrence Fox, and an eminent judge, Judge Thomas Griesa. We are fortunate to have such an unusually qualified panel.
Our panelists will go in the following order: Professor Brickman will go first. He has been a critic of contingent fees as they exist now, quite possibly the leading critic in the country. He teaches contracts, professional responsibility and land use, among other courses, at Cardozo Law School at Yeshiva University. His areas of expertise are lawyers’ ethics with a focus on lawyers’ fees, tort reform including administrative alternatives to mass tort litigation, and contingency fee reform. He’s widely quoted in the press. His writings have been influential in changing policy with regard to nonrefundable retainers and in setting the tone for national debate over tort reform. He’s been a member of the New York State Bar Association’s Committee on Professional Ethics and the Committee on Professional Responsibility of the Association of the Bar of the City of New York.
Our second panelist, Mr. Lawrence Fox, is a flaming liberal—his words, not mine—who has been a partner since 1996 and former managing partner in the Philadelphia law firm of Drinker, Biddle and Reath, where he specializes in corporate and security litigation in the counseling of lawyers and law firms. He is a fellow in the American College of Trial Lawyers, a fellow in the American Bar Foundation and a member of the American Law Institute, where he served as an advisor to the Restatement of the Law governing lawyers. He is also a member of the ABA Commission on the evaluation of the rules of professional conduct, chair of the ABA Post Conviction Death Penalty Representation Project, past chair of the ABA litigation section, and past chair of the ABA Standing Committee on Ethics and Professional Responsibility.
Judge Griesa was a trial attorney at the Law School Honor Graduate Program of the Department of Justice from 1958 to 1960 in the Admiralty Section. He then went to the admiralty law firm of Simons, Fish and Warner in New York. Then he went to Davis, Polk and Wardwell in New York City, where he became a partner. He was nominated for the federal bench by President Nixon in June of 1972. I might add that that was the only auspicious thing that happened to the Nixon administration in June of 1972. He became a judge for the United States District Court, Southern District of New York, in September 1972 and served as chief judge from March ’93 to March 2000. Judge Griesa cautioned us at the beginning that he doesn’t handle very many fee cases, but I think he is ideally qualified, after our first two panelists speak, to look for common ground.
PROFESSOR LESTER BRICKMAN: My task is to define the scope of the excessive fee problem and consider the responses of the judiciary and the bar. To do so, I am going to focus on the tort system, which, according to an American Bar Association report, “is a mirror of society’s morals and a legal vehicle for helping to define them.”4 Very pious words—and I suggest, on that basis, that we are a nation at moral risk. Our tort system is infected with perverse incentives that raise transactional costs to intolerable levels and inflate medical care costs by billions of dollars annually. Vast amounts of wealth are being transferred through the tort system under the cover of dubious claims—and in some cases, fraudulent schemes—such as those that permeate much of asbestos litigation. Despite arguments to the contrary, liability being assessed under the tort system continues to expand at breakneck pace. It is clear why this is occurring. It is a consequence of the defining feature of our tort system, namely, the contingency fee. Over the past 40 years, the effective hourly rate of return that contingency fee lawyers earn in inflation adjusted dollars has increased by ten to fifteen times. Effective hourly rates today are thousands of dollars an hour, sometimes $25,000 and $50,000 an hour; in tobacco litigation, the figure is as much as $200,000 an hour. The financial incentive for bringing contingency fee claims overwhelms all fiduciary, ethical, and public policy considerations.
One of the most important conclusions I have reached in my research is that the rate of wealth transfers in our tort system is a function of lawyers’ rates of return on their investments.5 Hourly rates received by tort lawyers have far more impact on the volume of tort litigation than, say, the frequency of injuries or the content of tort doctrine. This has profound implications for our civil justice system. The principal effect of the oversized incentive system is an enormous increase in the volume of tort litigation. While some question the existence of a “litigation explosion” by pointing to relatively static case filing rates in recent years, they conveniently omit from their statistics the tens of millions of plaintiffs represented by claims filed each year in the form of class actions.
Another effect of the fee-incentivized system is the spawning of an injury industry. Two thirds of automobile accident claims—and, by the way, automobile accident claims are approximately 60% of all tort claims—include claims of whiplash associated with bodily harm. Despite all of the miracle cures of our modern medical system, whiplash remains untreatable. I can say with absolute certainty that there never will be a cure. Consider two recent studies.
The first study was done of a European country where injured parties have their medical expenses paid by the state.6 In this country, there is no compensation for pain and suffering. The incidents of whiplash are zero. People who had been in accidents had no more or less chronic neck pain then people who had not been in accidents. In other words, chronic whiplash is not a medical event. It simply reflects the compensation system.
In another recent whiplash study, a Canadian jurisdiction was looked at that switched from a tort to a no-fault system.7 The conclusion here was no less striking. When tort compensation became unavailable, whiplash claimants experienced lower levels of pain, higher levels of physical functioning, the virtual absence of depression, and much faster recovery.
This country leads the world in whiplash claims because profit is such an integral part of the accident compensation system. The contingency fee provides a clear explanation. As a rule of thumb, pain and suffering damages—which account for almost 50% of total tort damages and which were an invention of judges as a means of compensating contingency fee lawyers—are worth approximately three times actual damages (actual damages being mostly medical expenses).8 Given the incentives for lawyers to run up medical bills in order to run up contingency fees, it is no surprise that, according to the Rand Institute for Civil Justice, 35% to 42% of medical costs claimed from automobile accidents are excessive or fraudulent.9
The self-interested response of the bar to all this is to cheer on the forces of “Litigation, Inc.” and to oppose attempts to limit the growth of the tort system. In 1994, the ABA Committee on Ethics and Professional Responsibility issued Formal Opinion 94-389.10 This Opinion deals with the ethical issues raised by tort lawyers charging standard contingency fees of 1/3 to 50% even in cases where liability is clear, damages are substantial, and the lawyer knew at the outset that she, in all likelihood, would earn windfall fees of thousands of dollars an hour. The Committee gave ringing endorsement to the practice of defrauding clients by vastly over charging them in these situations. Elsewhere, I have characterized the Committee’s opinion as wrong as a matter of ethics law, malevolent as a matter of public policy, disingenuous in its presentation, unfounded in its critical assumptions, illegitimate in its rejection of ethical considerations in favor of political partisanship, and blatantly self interested in elevating lawyers’ financial interests above their traditional fiduciary obligations to clients.11 I would also suggest that the opinion is fattening (to lawyers’ wallets).
In the same article I concluded that Formal Opinion 94-389 is a distressing display of ethical insensitivity to the current practice of routinely over-charging contingency fee clients. It simply reflects the mutual financial interests of the trial and defense bars; both want to preserve windfall fees as a way of promoting litigation. I noted that when the battle between ethics and money is played out, there can be no doubt about the outcome. Money talks; ethics walks.
Larry Fox, my fellow panelist, is the author of this ABA Opinion. He will, no doubt, point out that while the Committee said that charging standard contingency fees is almost always ethically permissible, such charges have to be “reasonable.” Enforcing ethical standards by invoking the reasonable fee standard is based on the following syllogism: lawyers who charge unreasonable contingency fees violate the ethics codes. Violations of the ethics codes result in disciplinary sanctions. Therefore, in the world of the ABA, contingency fee lawyers are subject to ethical constraints. There is a critical flaw in this logic. Contingency fee lawyers are virtually never disciplined for charging unreasonable fees, that is, for charging substantial risk premiums in cases without meaningful risk. Presumably, the ABA knows that there are virtually no disciplinary sanctions applied to contingency fee lawyers for charging unreasonable fees; I suggest, then, that the ethical standards of the ABA may properly be questioned.
To unmask the duplicitous nature of the reasonable fee mantra, I did an empirical survey of the enforcement of ethical norms in the contingency fee area.12 The findings are appalling. Stated simply, in most jurisdictions, a lawyer charging a standard contingency fee in a tort claim essentially ends any ethics inquiry about the excessiveness of the fee. There is no case-by-case enforcement for even gross abuses of ethical rules regulating contingency fees. The failure of the disciplinary system is massive; one can reasonably conclude that, in reality, there are no ethical rules regulating the use of standard contingency fees.
Let me turn to the response of the judiciary to the excessive fee issue. There is little basis for optimism that this problem will be solved by the courts. When contingency fees received the imprimatur of the fledgling ABA almost a century ago, it was on the condition that courts carefully supervise fees to protect clients against lawyers’ overreaching. Overreaching was understood as charging percentages that yielded rates of return not commensurate with risk. Courts once upon a time did indeed protect clients, at least on occasion; for the most part, however, no protection occurs today. The judicial regulatory scheme has become a device more for public display than for client protection.
Some judges justify a laissez-faire approach by saying that fee setting is a matter of private ordering. The tort system, however, is a public institution and fees that are charged to access the civil justice system are a matter of public concern. Moreover, in each jurisdiction, the contingency fee is fixed by tort lawyers. There is no bargaining that takes place about the fee. So much for private ordering.
Two areas where courts cannot eschew responsibility for enormous increases in fees are in class action and common fund cases. Courts award fees in these cases that vastly and routinely over-compensate lawyers. Judges justify the fees by noting that attorneys must have sufficient compensation, by way of incentive, to undertake litigation. Even accepting that claim at face value, it does not justify the enormous fees—the hundreds of millions of dollars—being awarded. Moreover, use of the lodestar instead of the percentage method for fee setting does not eradicate over-compensation. The unspoken truth about the lodestar is that it is often laden with uncountable numbers of hours. These hours are counted even though they lack credibility.
If law firms were audited to determine how many hours each lawyer was claiming in all of their class action cases, I have no doubt that, in many, fees would be literally out of this world. Instead of a day being merely 24 hours, as it is on Earth, the number of hours in a day would more closely correspond with those on Saturn or Jupiter. A principal consequence of over-compensation is the proliferation of class action activity without any redeeming social value. It is simply fee-driven.
One of the more pernicious fee setting devices that courts have permitted is the basing of class action fees on artificial settlement values when actual payments to the class will be a fraction of that amount. Thus in the type of settlement called the “reversionary settlement” where funds unclaimed by the class revert to the defendant, the fees awarded can easily amount to 200% or more of the amount actually paid to class members.13
Another judicial response deserves mention. If you hire a lawyer and she sells you out or performs incompetently, you have certain protections as a client. You can sue for breach of fiduciary obligation or for malpractice. But if the lawyer hires you—that is, if you have been conscripted into a class action—all of your protections have been stripped away by the courts. Even if the class action lawyer performs abominably or deliberately sells you out, even if the settlement is so egregious that it requires you to reach into your own pocket to pay the lawyer, once a court accepts the settlement you have no legal recourse. Thanks to the courts, you cannot sue for breach of fiduciary obligation or malpractice. The courts have erected firewalls around class action lawyers to protect them, no matter how outrageous their conduct. This is a leading reason why class action lawyers are increasingly selling out claimants’ interests. They can bargain away class action rights for a higher fee without repercussion. Excessive contingency fees promote wealth transfers, I suggest, that should make the Mafia envious.
In summary, we can expect no support from the bar for reform and there is little reason to look to the courts. (There is, however, a recent Second Circuit decision, Goldberger vs. Integrated Resources,14 which indicates that some judges are aware that current class action fees vastly over-compensate lawyers.) I think the only possible source of relief is in the legislative arena and, perhaps in the western states, in the use of the initiative process. I will leave that possibility to be discussed by other panelists.
MR. LAWRENCE FOX: I expected that after Lester finished the ABA would lie bleeding on the floor. I wasn’t so sure that the judiciary would suffer but it took a beating as well. I didn’t realize that to defend contingency fees I would need to become an expert on the existence or nonexistence of whiplash. Since I do not know anything about the subject, I’ll have to confine my remarks to arguments I anticipated.
I have worked for the American Cancer Society and for the Big Brothers’ Association. Today, my charitable impulses are directed at Mel Weiss, Dick Scruggs, and Peter Angelos. I am here to defend the contingency fee system. I do not believe it is perfect. But I do think we ought to go back and look at first principles. What does the contingency fee system provide? It provides access to the courts for the adjudication of claims that otherwise would not be litigated. This, it seems, is the heart of the controversy: most people who rail against class actions and contingency fees are the object of these claims. Understandably, those who are adversely affected by these things oppose them. The important considerations, however, are whether these claims are valid and whether these claims would get heard if a contingent fee were not available. I submit that they are and that they would not. We should be proud that our legal system allows these claims to be brought instead of barring people from the courthouse door.
The contingency fee system is wonderful for those of us who deal in billable hours and hear our clients complain about that method of billing constantly. The contingency fee aligns the interests of the lawyer and the client perfectly. I admit you can have overreaching. Absent overreaching, however, the client’s interest in a larger recovery and the lawyer’s interest in increasing the fee are perfectly compatible, and this arrangement is preferable to a situation where my clients complain that I am spending too much time on their case or assigning too many associates to the matter. Contingency fee clients never have to worry about the lawyers’ efficient or inefficient work since their fee does not turn on that factor.
In the contingency system, where there is no recovery, there is no fee. Lester and those who agree with him suggest that, in the American tort system, 100% of claimants are collecting huge amounts of money, but it is money that was available to these claimants at the outset of the representation. A quick look at the statistics on these cases reveals, to the contrary, how many plaintiffs’ cases are lost. I am proud of those defeats because I come from a defense firm. Many cases go to trial and the plaintiffs’ lawyers lose; both lawyer and client, therefore, walk out the courthouse door with nothing.
As for the much maligned ABA Formal Opinion 94-389: I would ask each of you to read it and determine for yourself if it is as malevolent, irresponsible and destructive as Professor Brickman suggests. We were asked a number of questions that led to preparing 94-389. One of them was this: if a client receives an early settlement offer and if that early settlement offer is declined, is it permissible for a lawyer to charge a contingency fee on that early settlement amount? Imagine that you get an early settlement offer of $10,000. You ultimately recover $100,000. Is the lawyer entitled to 30% or 25% or 40%—whatever the arrangement is—of that $10,000? We said yes. First of all, the early settlement offer is by and large a myth. There are some reasonable early offers like these, but early settlement offers are usually so insultingly low that they are not worth paying attention to. Second, consider a good early settlement offer that is turned down by the client. The problem with the earlier hypothetical is that it assumes that that $10,000 remains sitting there waiting for the plaintiff any time she wants to take it, even if she loses in court. That is not the case. I have made early settlement offers, on occasion, and when they are rejected I take them off the table. I then try to assure that the plaintiff recovers zero. I force the plaintiff’s lawyer to fight for that first $10,000 just like she has to fight for the rest of the money. Thus lawyers truly earn that fee. The Commission’s response was reasonable and certainly not unethical.
The Commission was also asked whether it is ethical to charge a contingency fee where liability is clear. This too, in large part, presents a mythical situation. Airline cases may be clear, but these are certainly exceptions. In any event, considering the hypothetical, we concluded that it is perfectly acceptable to charge a contingency in that case. Even when liability is clear there is a fight over the amount and the allocation of damages. There are many other imponderables in the process. For instance, after you get your judgement do you collect it? Is there a deep pocket that is prepared to pay it? Is there going to be an appeal on the basis of excessive damages? If a lawyer charges a contingent fee in a case of clear liability it remains ethical. I am proud of the opinion; it got it exactly right.
Lester’s gripe, which is legitimate, is that the rule we’ve got—namely, Rule 1.5—is not enforced. This does not mean that the rule is not correct. It also does not mean that the solution to the problem is to eliminate contingency fees, severely restrict them, or invite the legislatures to change them. On that point, the last thing we should do is to invite legislatures to muck around with legal business. The regulation of lawyers should remain exactly where it is, with the judiciary. As soon as we go down the legislative path, we may gain something important regarding the reform of contingent fees, but the lawyers of America will lose something far more important, namely, professional independence.
Let me turn briefly to the tobacco fee cases because they have set off many alarms. I argued, even before these cases were decided, that if tobacco fee lawyers received huge fees they were entitled to them. Tobacco agreements, for example certainly the one crafted by Peter Angelos, were negotiated with extraordinarily sophisticated clients after a request for proposal was issued and bids were submitted. Mr. Angelos’ bid was the lowest of all the bids Maryland received. Few lawyers, I remind you, wanted to take those cases back then. The arrangement was for 25% of the recovery fee, a fair fee when it was entered into and a fair fee now that it’s worth a billion dollars or whatever the figure might be.
Why do I think this result is fair? If the Attorney General of Maryland was told on the day that the tobacco agreement was signed that the lawyers would get one billion if the state would get four billion, he would have been thrilled with that result. These arrangements were agreed to because that result was so unlikely. The Attorney General of Maryland, I recall, was so uncertain of the outcome that he wasn’t even willing to front the expenses. Peter Angelos did.
Everybody is asking, now, if the lawyers’ fees are reasonable. No one is particularly interested in looking at cases where the result goes the other way. When the first person approaches a lawyer who handles a contingent fee matter and says, “you know, I agreed to give you 1/3 here because I thought I would recover a million—but since we only recovered $50,000 and you put in a lot of work, I think you ought to get 50% or 75%,” then perhaps it will be time to recalculate contingent fees in the wake of unexpected success.
There is an obsession with hours in this context. Lester Brickman loves to talk about hours and hourly rates, but I don’t believe these things are important in contingency fee evaluations. Here I sit in the capital of free enterprise, the United States Chamber of Commerce Building, in a country devoted to capitalism. Does anybody ever figure out what a CEO’s salary is on an hourly basis? Do we care that Cindy Crawford gets paid $100,000 for half a day’s work? No. We make a decision that the economic impact of certain people’s activities is worth the money.
Why doesn’t this logic extend to lawyers? Lester calls attention to Rule 1.5; one of its multiple factors is number of hours. I ask: if a lawyer is very efficient and accomplishes an extraordinary result, does that make the fee unreasonable? I know lawyers have a special obligation not to charge unreasonable fees. But the question is whether the reasonableness of the fee should be measured by time or by result. I favor result; hours shouldn’t even be discussed. If you move four billion dollars from one side of the table to the other you should be rewarded just like a CEO is after creating a four billion dollar enterprise. Lester may not like the fact that four billion dollars is moving from one side of the table to another. But that is a different discussion. Perhaps we shouldn’t have cases against tobacco companies or manufacturer liability cases. These are also questions for another day. Lester’s objection has nothing to do with whether the fees themselves are actually reasonable.
Some legislatures have enacted rules limiting contingency fees. Most of them have got it wrong. Legislators say it’s okay for a lawyer to charge 25% of the first $100,000 and 20% of the next $100,000 and 15% of everything else. This strikes me as backwards logic within a free enterprise system. The first $100,000 is the easiest $100,000 to earn. Think about selling your house. Pick a number that is half the value of your house—you could sell your house for that figure tomorrow without any assistance. Why should the realtor get 6% of that first $100,000? Alternatively, if your realtor says she can get you a million dollars for your house, you would happily agree to give her 50% of the last $100,000 because you wouldn’t think your house is worth anything near that amount. The best work of the lawyer is the last billion dollars if it’s Peter Angelos, or it’s the last $100,000 if it’s mere mortals doing regular cases.
It’s time to stop flogging lawyers because they make a lot of money and because they have a huge impact on our legal and political system. People don’t like the influence of lawyers and therefore their fees have been made into a lightning rod for more general anger. The fee system is not perfect, but it’s adequate. I wish that every time a client came to a lawyer the lawyer would evaluate the individual case and come up with a fair number. The lawyers of America don’t do that and I don’t believe they are going to do that, which is a reality we have to deal with.
THE HONORABLE THOMAS GRIESA: In Federalist 51, James Madison notes that men are not angels. He describes a series of institutional arrangements that address this fact, a system in which different elements of self-interest largely cancel each other out. Elsewhere, however, Madison admits that citizens need a great deal of virtue and no political arrangement will work if they don’t have it.
Many questions have been raised by this panel. What procedural or legal arrangements are there for the controlling of attorneys’ fees? Should fees be calculated on an hourly basis or calculated as a percentage of recovery? Do our laws and ethics rules tend in one direction or the other? These questions are very important, and we should seek to answer them as well as we can. No arrangement, however, is going to prevent problems if the bar consists of abusive members and if clients are not alert. No revision of civil procedure, alone, is going to cure what ails us. You still have to deal with human beings whether you’ve got judges or arbitrators. Changing procedures does not change as much as we think.
What Lester described is terrible, namely, lawyers bringing class actions simply to collect fees. While this sort of abuse exists, I know from experience that a lot of class actions are very important on their merits. They deal with serious wrongdoing that has created liability. Some tort litigation is sheer fraud, but I am not so cynical to believe that litigation is all driven by thieves. All of the things that Lester spoke of I deplore. But I hesitate to remedy the situation by a change in fee arrangements. I also would like to point out that many recoveries are well deserved.
Let me comment on what judges should do about fees and whether what they do is successful. I do not know a great deal about what goes on in courts other than my own. I can only tell you what I do. I am a federal trial judge. I sit in the Southern District of New York. In normal cases—and by that I mean cases that are not class actions—I have no authority at all over fees. If a private party, corporation or individual, brings a lawsuit in my court, I have no authority to deal with this question. I say this having never looked up the law; the issue just doesn’t arise. Whatever arrangement has been made between the plaintiff and the plaintiff’s lawyer and the defendant and the defendant’s lawyer has been made entirely without my participation or knowledge.
Very often, however, I am present when parties conclude a settlement; they wish to call in a court reporter and have the terms dictated. I will hear a lawyer say that the recovery is, say, $150,000, to be paid by the defendant to the plaintiff. The lawyer for the plaintiff will make sure the client understands that, out of this sum, he will be paid, say, $50,000.00 plus $4,500.00 in disbursements. The client agrees, and I have no way of knowing whether he is unhappy or happy. I cannot recall an instance when there was a dispute about the terms in my presence. Not infrequently, in the course of the settlement discussions, the lawyer will reduce his fee. He will say, “look, we are entitled to such and such but in order to encourage a settlement we will reduce that amount.” This is an indication—albeit a small one—that there are honorable lawyers out there who are not wholly fee driven, who are not trying to get the last buck they can in the worst possible way.
Not only do I not get engaged in fee issues, until recently I have not even considered the issue under discussion. The first time I seriously thought about contingency fees was when I attended a luncheon given by the Manhattan Institute in New York City. I heard Professor Painter, who is on a later panel, speak about the problems with the fee system. I confess this so you can see how far divorced at least this trial judge is from the issue. I am not blasé about the topic, nor do I suggest that these things are not extremely important. But the issue has not come my way.
To some extent, there are fraudulent lawsuits. There are devils and angels among lawyers, as there are among all human beings. There are certainly situations where there are excessive recoveries, and there are recoveries in cases where they are not deserved. Recoveries in some actions have put a terrible tax upon businesses and have caused the production of certain products to cease. There are severe impacts on the medical profession and the hospital industry. Remember, though, that there are rules of law. There are jury instructions given by judges. If there is a need for change, if certain aspects of recovery in lawsuits are excessive, there ought to be some examination of the rule of law and the way judges instruct their juries.
You can’t hear too many people in the legal profession speak for long without claiming to be a hero. I am no exception. I am very concerned about excessive damages and there are a couple of things I do to address the issue. When, in a tort case, a litigant talks about millions and millions of dollars in damages, I instruct the jury that the purpose of the damage award is not to transport somebody from low economic status to Palm Beach or the French Rivera. The purpose of damages is to compensate fairly and to recognize the type of economic level the person is in. I’ve given that instruction over and over and nobody has even ever appealed it.
One of the problems in our tort system is excessive punitive damage awards. There are many things you can say to a jury by way of instruction. I think the highest punitive damage award ever awarded in a case of mine was approximately $70,000.
Let me mention the instances when federal judges do get involved in fees. These, of course, are class actions and derivative actions. I don’t recall too many derivative actions recently; I’ve frequently handled class actions.
Many class action settlements, including the approval of legal fees, are very modest. This situation reminds me of reactions to the OJ Simpson trial. That trial was broadcast all over the world and I suppose people in Pakistan and Nigeria thought it was a typical case; meanwhile, in courts throughout America, calm, low-key, businesslike trials were going on without much attention. While I don’t know much about the tobacco case or other attention-grabbing litigation, I do know what goes on in typical class actions. First of all, cases are generally settled. I have never tried a class action to conclusion. Secondly, the plaintiffs’ lawyers often do a lot of work. Third, settlements are often quite modest because nobody has a lot of money to put into the settlement; and often the fees are quite modest as well. Frequently, fees have to be a percentage of the recovery because the hours spent cannot be compensated.
In our circuit, there was a recent case dealing with class action fees. Professor Brickman referred to it earlier—Goldberger vs. Integrated Resources. The decision was written by Judge McLaughlin. It considers a settlement that was reached in a case concerning the Drexel Burnham Lambert Group that totaled 54 million dollars. The plaintiffs’ lawyers applied for a 25% fee of that 54 million, which amounted to 13.5 million dollars. Judge Kram, the trial judge, awarded 2 million dollars, approximately 4% of the recovery. The plaintiffs’ lawyers went to the Second Circuit and made very strong objections. Judge McLaughlin turned them down. It’s a very interesting opinion and it indicates that, at least in our circuit, a trial judge has the discretion to use a percentage of the recovery as a basis for fees or to consider the number of hours actually and reasonably billed. Judge McLaughlin gave a very strong endorsement of a moderate fee award. This case suggests that courts are trying to curb the excesses in class action fees.
MR. TAYLOR: My question to the panel concerns the analogy that Mr. Fox made between the lawyer and the entrepreneur. We live in an age of entrepreneurs, twenty-something Internet billionaires and hugely compensated corporate executives whose rate of pay goes up exponentially compared to their employees. Like lawyers, a lot of these people are fiduciaries. We don’t hear much talk about capping their compensation. My question: is there something different about lawyers or about the legal system that demands that we treat them differently? Alternatively, if the analogy to entrepreneurs is accurate, why have any rules against unreasonable fees?
PROFESSOR BRICKMAN: I think there is something fundamentally different between corporate pay and lawyers’ fees in the context of a tort system. Larry Fox said, in opposition to my recommendation that there be legislative solutions, that he favors a self-regulatory system. In fact, Larry wants it both ways. He wants legislatures to butt out so that lawyers can regulate themselves. One of the requirements for the self-regulatory system, of course, is that fees are reasonable. Notice that Larry doesn’t want fees regulated to ensure their reasonableness. He wants, then, a regulatory system that keeps fees from being regulated.
We’ve had for four or five hundred years in Anglo-American law the concept of a fiduciary obligation. From the very outset, lawyer fees have been regulated; this goes back to the origin of lawyer fees in England. There has always been court regulation of lawyers’ fees, certainly, in the past more so than today. If we are going to have a self-regulatory system then it ought to work. The words “fees shall be reasonable” should have some content. I dare say that if you look at the tobacco fees, which have been exempted from the regulatory system, no one, except maybe Larry, can argue that they are reasonable. The requirement of a reasonable fee is vacuous or the Bar has simply stepped aside—which is what I suggest—and allowed abuses to proceed without any overlay of ethical and fiduciary concepts. I certainly object to that.
MR. FOX: Lawyers’ fees should certainly be reasonable. The ethical mandate means something. There are legions of cases where lawyers have overreached; most clients are not sophisticated and it is easy to see how this happens. The power imbalance in the lawyer/client relationship requires that we have a rule and that that rule be enforced. I urge that it be enforced more frequently.
My point, alternatively, is that when you have a highly sophisticated consumer of legal services and a highly sophisticated lawyer and they engage in negotiations, and the prospect of a billion dollar recovery or a ten billion dollar recovery is remote. Once in a while, after a 25% fee is agreed to, lo and behold, the lawyer succeeds beyond everyone’s expectations. The 25% is still a reasonable fee. One measure of its reasonableness is how other people who cause similar economic impacts are compensated in our country. The analogy with entrepreneurs isn’t perfect. But the free enterprise system dictates that it is reasonable to pay a CEO—a fiduciary, I hasten to add—an extraordinary amount of money because of an extraordinary accomplishment. I have no trouble defending the tobacco fees as reasonable if they were negotiated in that way.
JUDGE GRIESA: There is no question that a lawyer occupies a unique role in our system. A litigation lawyer is different from a basketball player, an entertainer, or a corporate executive, among other reasons, because litigation is carried on in court and it depends to a certain extent on public resources. This said, I generally believe that it is better to leave the setting of fees to market forces. I dread the prospect of legislatures trying to manage fee arrangements. I envision a setup of unpleasant complexity; I also envision mistakes made and the need for frequent revisions.
The market should, alternatively, be influenced. It undoubtedly is influenced by increased discussions of this subject. Changes will neither be perfect nor fast, but I prefer a gradual method to a flurry of codification.
AUDIENCE QUESTION: What would the appropriate compensation be for the lawyers in the Toshiba case?
MR. TAYLOR: The actual fee award was $147.5 million, which was, I think, only about 10% or 15% of the total. I would be interested in knowing what this comes to on a dollar per hour basis. I’d also be interested in knowing whether whatever entrepreneurship led to that settlement is going to be leveraged into multiple settlements with other companies at similar rates.
AUDIENCE QUESTION: Larry argues that the obligation depends on who the client is. He implies that if the client is Union Carbide or another sophisticated consumer of legal services, the lawyers’ fiduciary obligation is minimized in comparison, say, to a widow who can’t speak English. That shifting standard just doesn’t hold water with me.
MR. FOX: That is not my argument. The fiduciary obligation always remains the same. My point is that one way of judging whether the fiduciary obligation is fulfilled is to consider whether you are dealing with players with equal power and equal market sophistication. I think it makes all the difference in the world. If the tobacco cases had been negotiated not with an attorney general but with a clerk in the attorney general’s office who was told 25% is fair and she said “great,” we would adopt a completely different analysis of this situation. Maryland gave out an RFP. It was sent to 150 law firms, and only 6 submitted bids. This is a measure of how many people were willing to take the risk. A sophisticated consumer of legal services signs an agreement and says this is wonderful—my state is well served by this. The same state cannot now walk away from the deal later and claim breach of fiduciary obligation.
Alternatively, if you had a situation where a lawyer hoodwinked another lawyer, knew some information and didn’t share it with a prospective client, it wouldn’t make any difference how sophisticated the client is even if it was the general counsel at Union Carbide or a former counsel at Aetna. Sophistication is irrelevant: you still have the fiduciary obligations of disclosure and fairness. My point, again, is that one measure of reasonableness is the negotiation process itself. In a country that celebrates free enterprise, I think it is appropriate that willing buyers and willing sellers make agreements both think are fair.
AUDIENCE QUESTION: Can fee reform work in classic class action cases where there is no real client to negotiate with about a fee?
MR. FOX: It doesn’t work at all. This is why courts need to be active in the fee setting area; judges have a very significant role to play when the client is only a nominal client. This, by the way, doesn’t depreciate the value of these cases. Here, courts have to be active in evaluating the work that is done in front of them, the amount of time spent, and a variety of other factors.
Consider the common fund cases where there was no initial client. If you had a deal with that first client and he said I’ll get you a 25% fee it would be irrelevant; somebody has to come in and overlook this process. That’s completely different from the Maryland Attorney General negotiating with Peter Angelos.
AUDIENCE QUESTION (to Mr. Fox): You argue that the legal profession should be self-regulating. Professor Brickman cited the RAND Institute study that found that 35% to 42% of all medical claims in auto cases are excessive or fraudulent because of incentives in the tort system, namely the pain and suffering multiplier. The cost of this activity is approximately four billion dollars a year. The Insurance Research Council looked at 87,000 closed claims for auto accidents and found comparable results. In similar claims, people who dealt with lawyers recovered four times as much money as those who did not; however, the actual dollars going to clients with lawyers was less. In the wake of this activity, could you tell us what the Bar has done in disciplining its members?
MR. FOX: When I say that the industry is enforcing its own rules, it is important to remember that each state has its own disciplinary authority. Professionals can file complaints. If defense lawyers for those insurance companies aren’t filing complaints in fraudulent cases then we are not going to achieve any adjudication. Incidentally, I was retained at one point on this issue. There are statistics that show quite different results from what you claim; in fact, people do much better monetarily when they use a lawyer than when they don’t.
JUDGE GRIESA: In response to the earlier comments about fraudulent recoveries for whiplash, I think the way to deal with this is to attack the liability rules themselves, the loose rules of law that allow these things to proceed. The Manhattan Institute has actually taken this approach. Peter Huber wrote a book about expert testimony.15 Walter Olson has written a book about the law of employment discrimination.16 Those writings and others like them have influence in the court system and get to the root of these problems.
[ panel two ] [ panel three ]