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Critics of the U.S. tort system often argue that the contingency fee system provides incentives for excessive litigation. Many of the criticisms and suggested policy reforms are based, however, on anecdotal evidence, rather than on systematic study of the contingency fee system. While capping contingency fees is still one of the most favored reforms, research by Alexander Tabarrok and Eric Helland suggests that rather than solving the "crisis," the caps increase the number of frivolous lawsuits. Further research by Jonathan Klick and Helland suggests that in federal class action suits judges in busier districts tend to allow higher attorney fees in an attempt to expedite the resolution of the case. Theodore Eisenberg and Lester Brickman will respond.
| 1:45 p.m. | Registration | |
| 2:00 | Presenters: | Jonathan Klick, AEI and Florida State University College of Law |
| Alexander Tabarrok, George Mason University | ||
| Discussants: | Theodore Eisenberg, Cornell University Law School | |
| Lester Brickman, Benjamin N. Cardozo School of Law | ||
| 4:00 | Adjournment | |
September 2004
What Do We Know about Contingency Fees?
Critics of the U.S. tort system often argue that the contingency fee system provides incentives for excessive litigation. Many of the criticisms and suggested policy reforms are based, however, on anecdotal evidence, rather than on systematic study of the contingency fee system. While capping contingency fees is still one of the most favored reforms, research by Alexander Tabarrok and Eric Helland suggests that rather than solving the "crisis," the caps increase the number of frivolous lawsuits. Further research by Jonathan Klick and Helland suggests that in federal class action suits judges in busier districts tend to allow higher attorney fees in an attempt to expedite the resolution of the case. Theodore Eisenberg and Lester Brickman responded to their research at a September 22 AEI conference.
Alexander Tabarrok
George Mason University
Alex Tabarrok presents a paper jointly authored with Eric Helland titled "Contingency Fees, Settlement Delay, and Low-Quality Litigation: Empirical Evidence from Two Datasets."
Under a contingent fee agreement, counsel benefits only if the case yields money and cannot benefit from unnecessary or inefficient works. If a favorable decision seems unlikely, an attorney working on a contingency fee agreement is likely to counsel his client not to bring the suit. In contrast, an attorney charging hourly fees is more likely to begin litigation with relatively low likelihood of success. Eventually, some clients paying hourly fees will gain information about the probable outcome of their lawsuits, and will drop their cases after paying their attorneys' fees.
In states where contingency fees are limited, we would expect a greater portion of lawyer compensation to be hourly. Therefore, we should observe more of these "drops" in states that limit contingency fees. A significantly higher number of drops would indicate, contrary to popular wisdom, that more suits of questionable merit are brought where contingency fees are limited.
Medical malpractice data from states with limits on contingency fees are compared to data from states without limits. As a control we use automobile accident cases, where fees remain uncapped in both states. We find that contingency fee caps increase the number of dropped cases. Another experiment compares data from Florida before and after the implementation of a contingency fee cap. Again, the data show that capping contingency fees increases the number of dropped cases, thereby implying that more cases of dubious merit are brought to trial when contingency fees are not capped.
Reducing the amount of excessive litigation will require focusing on the problem itself instead of using indirect measures such as fee caps. Fee caps reduce the benefit of contingency fees, and their unintended consequences exacerbate the problem caps attempt to solve.
Lester Brickman
Benjamin N. Cardozo School of Law
Alex Tabarrok's paper has several false assumptions. His assumption that contingency fee caps are a surrogate for hourly rates does not reflect the real world. Attorneys do not combine hourly rates with contingency fees--they do in commercial litigation, but not in tort cases. Instead, caps are a practical way of lowering the effective hourly rate of return to attorneys, thereby reducing the overall volume of litigation.
Contrary to Tabarrok's assertion that there is no reason to think fee caps will decrease effective hourly compensation, there is no reason not to think that caps will decrease effective hourly compensation. Fee caps will move the threshold of risk such that attorneys working on contingency fees will take lower-risk, lower-return cases and pass on the higher risk cases of questionable merit.
In reaching his conclusions, Tabarrok assumes that a variety of fee agreements are available to plaintiffs, including agreements that waive fees. Empirically, the market for legal fees is not competitive, and so the kinds of flexible agreements which the paper presumes possible simply are not observed.
Tabbarok's critique of fee caps rests heavily on unwarranted assumptions. If society deems it a worthy goal, fee caps will reduce the volume of litigation by reducing the effective compensation to attorneys.
Jonathan Klick
AEI and Florida State University College of Law
Jonathan Klick presents a forthcoming paper jointly authored with Eric Helland titled "Court Congestion as an Explanation for Rising Attorney Fees."
Judges, like everyone else, seek to maximize their own welfare. Since their incomes are constrained, they will substitute leisure, conditional on prestige and reputation, by either letting their case queues grow or by resolving cases quickly with little effort. Incentives to sign off on proposed settlements with little scrutiny increase as caseloads grow. Because this should apply to attorney fee settlements as well, we would expect to see attorney fees rise with court congestion.
Using data on class action settlements, Eisenberg and Miller found that attorney fees are not rising, but their results are not conclusive. We replicate their paper using their data and some different specifications. Our results call into question Eisenberg and Miller's findings. We show that there is a slight upward trend in attorney fees.
We test whether or not this is related to congestion by regressing Eisenberg and Miller's attorney fee data onto court congestion data from the Federal Judicial Center. We find that a 1-percent increase in congestion results in an attorney fee increase of .13 percent, which is significant at the 1-percent level. We also find that a one standard deviation increase in congestion relative to another court leads to a 3-percent relative increase in fees as percentage of the total award, at a 5-percent significance level. These results are sensitive to a particular outlier, and when removed, they become .15 percent and 6 percent, respectively. In other words, as congestion increases, both fees increase, and the portion of the award claimed by attorneys as fees also increases.
Theodore Eisenberg
Cornell Law School
There are some outstanding issues in Klick's paper. First, the congestion variable is critically important to the paper, but not all cases require the same amount of work. For example, one antitrust case may require more work than many habeas cases. If possible, the caseload data should be weighted to reflect this reality. Also, not all cases have the same stage of disposition, and congestion will change according to the amount of work required there--for instance, early dismissals are different from summary judgments.
A more critical question is whether or not congestion is an exogenous variable. There is evidence that attorneys respond to the queue for trials when choosing where to bring litigation, and it may be the case that congestion is also a function of attorney fees.
Also, in our paper we separated the fee data based on certain factors. The laws which govern these cases are different, which suggests that your choice to aggregate the data may not be such a clear one.
AEI research assistant Michael Petrino prepared this summary.
