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FEATURED DISCUSSION
CONTINGENT CLAIMS


The Good and Bad of Contingency Fees

By James R. Copland
Posted on April 10, 2006, 09:14 AM

I'm very happy to welcome our friend Alex Tabarrok back to Point of Law this week to talk with me a bit about his and Eric Helland's empirical research on contingency fees. Our readers may remember Alex's interesting discussion last year with David Rottman of the National Center on State Courts on judicial selection and election mechanisms.

Alex and Eric's work in that area, along with invaluable work looking at juries, is summarized nicely in a new book, Judge and Jury: American Tort Law on Trial. I highly recommend this book for all our readers. It’s accessible to a lay audience without extensive legal training or a deep econometric background, and it covers some of the best recent empirical work done in the area of tort law. In a field where good data are sparse and empirical evidence is sometimes lacking (though it's far more plentiful than the plaintiffs' bar likes to pretend), Alex and Eric have led a new batch of empirical scholars who creatively use what data is out there to reach some very interesting conclusions.

While Alex and I largely agree on the need for tort reform—-both think that litigation in America is significantly more costly and more inefficient than it could be—-we part ways in our enthusiasm for the contingent fee. Based on their empirical findings as well as their preference for permitting private contracts, Alex and Eric give "two cheers" for contingency fees in the final chapter of their book. (Readers who have yet to buy the full book and want an accessible version of their paper should look at the AEI Liability Project's publication here.)

Why Contingency Fees?

At the outset, let me stipulate that I do not support wholesale elimination of the contingency fee. As Alex and Eric ably argue, there are some valid reasons for permitting plaintiffs to contractually shift the financing and risk of their case to their attorneys. Eliminating the contingency fee entirely would either lead to the evolution of less efficient financing alternatives or reduced access to courts for less sophisticated and financially well-off claimants, neither of which is a very defensible option.

Why do contingency fees make sense? Alex and Eric give the pro-contingency rationale in more detail, but in a nutshell, contingency fees are a mechanism for reducing information asymmetries and liquidity constraints. Taking the latter, simpler point first, a lot of individuals in the society are unable to afford to pay lawyers' high fees by the hour, but they may well have valid legal claims. Having legal costs assumed by the plaintiffs' attorneys in exchange for a piece of the ultimate verdict or settlement is one way in which such individuals can fund their prospective litigation.

The other major problem for most plaintiffs—-at least individuals without legal training and resources—-is that they lack the ability to value their potential case as well as the ability to monitor their lawyers' pursuit of the case. The hourly fee arrangement places the burden for such unsophisticated plaintiffs on the ethical scruples of their attorneys. An unethical lawyer might agree to take a case without merit, rack up legal fees, and later drop the case, profiting from the unknowing plaintiff's lack of sophistication. Or, the lawyer might encourage the plaintiff to go on litigating in the face of a perfectly good settlement offer, because the lawyer keeps getting paid regardless of whether it's worth the additional expense from the plaintiffs' perspective.

Big companies or sophisticated parties can more effectively monitor their lawyers, but the threat of lawyers bilking their run-of-the-mill clients is very real. This hypothesis—-that with contingency fee limitations, you see lawyers taking on more bad cases and taking longer to settle them, on hourly fee arrangements—-underlies Alex and Eric's interpretation of their findings, which I'll leave to Alex to explain in more detail. I'll get into my specific objections to that interpretation tomorrow, but for now I want to lay out the basic economic case for limiting contingency fees.

Why Limit Contingency Fees?

In essence, the contingency fee restrictions Alex and Eric examine are of the following sort: the state mandates a fee percentage above which attorneys cannot charge. Some states have outright limitations on fees for all cases, some for only certain types of cases (e.g., medical malpractice), and some have fee limits that kick in, or shrink, as payouts get larger. I think that there's a strong case that such contingency fee limits do make some theoretical sense.

Using the simplifying assumption that all cases go to trial (of course, only a fraction do, but settled cases are going to be a function of expected trial outcomes), the plaintiffs' lawyer on a contingency fee approaches the case with the following expected return:

EV = F*Pr*D – C

Where

EV = expected value of case to plaintiffs’ attorney,
F = contingency fee ratio,
Pr = probability of success at trial,
D = expected damages at trial, and
C = cost of pursuing and trying case.

Under these assumptions, then, the lawyer takes any case in which his expected return is positive, i.e.,

F*Pr*D > C

What becomes immediately apparent is that under a contingency fee arrangement, plaintiffs' lawyers accept not only cases that are likely to succeed but long-shot cases with high potential damage payouts. A risk-neutral plaintiffs' lawyer with a diversified portfolio of cases is just as happy to take a case with a 1 percent chance of paying out $20 million as a case with an 80 percent chance of paying out $250,000.

But as a society, do we really want to be flooded with high-dollar, low-probability claims? The contingency fee creates a very real incentive to play the "lawsuit lottery"—a lottery with positive expected returns for the plaintiff and client, but substantial social costs. At a very basic level, the contingency cap, while a crude mechanism, ameliorates this problem. If a lawyer's take in a case goes down—-especially for high-dollar cases-—the incentive to take shoot-the-moon cases falls proportionately.

In chapter 2 of The Litigation Explosion, my colleague Walter Olson compares the contingency fee to analogous arrangements we find odious: traffic cops having an incentive to give more tickets (through, e.g., monthly "quotas"), IRS agents being given financial incentives to find more problematic tax returns, and soldiers in conquering armies getting to keep some of the "spoils" of the conquered peoples. What's crucial to recognize in each of these examples is that they involve using the heavy hand of government force to redistribute wealth—-which is no less true of tort lawyers and their clients. They may reach private arrangements, but make no mistake that plaintiffs and their lawyers are using the government's monopoly over legitimate force to take money from unwilling parties.

In some instances, is this redistribution through tort law warranted? Of course, just as in some instances traffic tickets, IRS audits and prosecutions, and military actions are warranted. But those of us committed to limited government should be ever watchful for keeping the scope of such government interventions appropriate.

I have lots more to say. Specifically, my simplifying equation for how a plaintiffs' lawyer approaches a case ignores two very basic points: (1) that the probability of success, and likely damages, are a range rather than a fixed level for any case; and (2) that the such ranges—-as well as legal costs-—are not constant across the entire time litigation is pursued. Relaxing those core assumptions forms the heart of my critique of the conclusions you and Eric draw from your results. I'll get to that tomorrow.

Until then,
Jim


The Contingent Fee Distraction

By Alex Tabarrok
Posted on April 10, 2006, 11:47 AM

Jim, we agree about a lot in Judge and Jury: American Tort law on Trial but agreement is boring so I'm glad that we will focus on one area of disagreement, contingent fees (or, as you say, contingency fees. See, we can't even agree on what to call them!)

Briefly, I think that contingent fees are not a driving force behind problems in the tort system and capping them could have serious unintended consequences.

First, contingent fees have been around for well over a hundred years - thus they cannot be responsible for problems in the tort system that have developed over the past several decades.

Second, tort reformers are usually respectful of markets and private contracts. Indeed, they rightly point to the death of contract (some say it was murder!) as a cause of current problems. Yet when it comes to private contracting between a lawyer and her client, regulation is now in order. That inconsistency bothers me.

If a lawyer and her client want to contract in Lira what business is it of the state to interfere? If the lawyer and client agree on an incentive plan, why should that be regulated? Do we want to regulate contingent fees in other areas? A money-back guarantee, for example, is a contingent fee - you pay only if the product is a winner. A tip is a contingent fee - you pay only if the service was good.

True, not all contracts should be respected - we don't enforce contracts against the public interest - nevertheless, my spider-sense starts to tingle whenever reformers of any stripe try to abrogate private contracting.

It should now be clear that I am not against regulating fees, contingent or otherwise, in class action suits. In class action suits there is no private contract between a lawyer and client. It's all lawyer and that is a recipe for abuse. The type of contingent fee restrictions that have been passed and that Helland and I analyze in Judge and Jury, however, are not restricted to class action cases.

Contingent fees have some good qualities, some of which you have already mentioned. Contingent fees allow injured but cash-poor individuals access to the legal system, they spread risk from plaintiffs to lawyers, and they act as an incentive system for lawyers who would otherwise be difficult for clients to monitor.

It's the last point which explains why restrictions on contingent fees can actually increase the number of frivolous lawsuits. A lawyer paid by the hour is paid regardless of whether the case has merit. But a lawyer paid by contingent fee is paid only if the legal system agrees that the case has merit. As a result, lawyers paid by contingent fee will screen cases more closely than those who are paid by the hour - thus doing the legal system a favor. More on that later.

You are correct that a lawyer on contingent fee may have an incentive to take on some cases that have a low probability of winning but high damages if they do win. But the lawyer's client has exactly the same incentives (indeed, given a contingent fee of 1/3rd, twice as strong incentives!) Thus the argument must be that these cases will go to court with contingent fees but not without them. But why would this happen? Only because clients wouldn't have the cash to take these cases to court - thus we are asking liquidity constraints to do our tort reform for us. I don't like tort reform by the back door.

Not all low-probability, high damages cases lack merit. Nor will capping contingent fees prevent all low-probability, high-damages cases from accessing the courts - only the low-probability, high damages cases where the client can't fund the case in some other way will be stopped. Can we be so sure that clients with little cash are the real danger?

Capping contingent fees is a blunt weapon and I am not at all confident that it hits the right people or hits enough of them to justify the hits that others must take.

Tort reform should aim more directly at the true source of problems in our current system namely judges, juries, and the law.


Private Contracts and Market Failures

By James R. Copland
Posted on April 11, 2006, 02:37 PM

Alex,

Your comments are typically thoughtful and lucid. I have so much to say, so I'm going to start with a very basic reaction to your post. I'll then post later today with more detailed thoughts about the empirical evidence you and Eric put together on this issue.

First, again, I'd like to emphasize where we do agree: that fee regulation is not inappropriate for class actions. That concession is actually a major step in the right direction. Class actions are a particular problem in that low probability claims very regularly have fairly high expected returns for the plaintiffs' attorneys working on a contingency fee merely due to the size of the class. As you note, in no way can we say that class members are actually able to negotiate at arms' length for fee contracts, since they're automatically in the class unless they choose to opt out. The lawyers drive the process. Securities class action lawyer Bill Lerach has noted that his legal practice is "the best" since it has "no clients."

I wonder if you'd also extend that position to mass tort claims? There, plaintiffs aren't automatically in the class, so you could say there's (in theory) some fee negotiation. But plaintiffs' attorneys advertise aggressively to pull together thousands of claims. Often, such claims wind up being manufactured. Courts are flooded. Again, the contingent fee is the primary driver in these cases because the aggregate nature of the claims makes speculative cases much more valuable. Television, internet, and radio advertisements trolling for clients wouldn't be nearly so effective if the clients weren't told "you pay nothing unless you win."

Taking television advertising as an entry point, let's look at why I don't buy your argument that contingency fees "have been around for well over a hundred years -- thus they cannot be responsible for problems in the tort system that have developed over the past several decades." Yes, contingent fees -- like the "American rule," like civil juries, like elected judges, like so many other features of American law -- are deeply rooted. But it simply does not follow that such entrenched features of our legal system are not related to the litigation explosion merely because they've been around a long time; it only follows that such features are not solely responsible. 100 years ago, there were no aggregate claims like today's class actions and mass torts; tort claims were much more restricted by substance and procedure (indeed, there wasn't any products liability law to speak of -- see Richard Epstein's discussion of the evolution of products liability law here); federal courts weren't bound to apply state law under Erie v. Tompkins; transportation costs were much higher (making forum shopping much more difficult); there was no television, radio, and internet; and attorneys were not permitted to advertise.

The real question is whether any of these changes, interacting with deeply rooted features of American law (like the contingency fee, no fee-shifting, elected judges, civil juries, federalism, etc.), have contributed to the increase in litigation costs. My claim is yes. And it's not because the changes are necessarily all bad; rather, we may need to look at the long-standing rules as well. For instance, a free speech purist like myself agrees with the Supreme Court that attorneys have the right to advertise commercially. But there's no question that such a right changes attorney behavior. When attorneys can aggregate mass tort claims on a contingent fee, the payoffs are huge. Folks who may or may not be sick are happy to sign up when there are "no fees unless we win."

Private Contracts and Contingent Fees

I, like you, am generally a big fan of private contracting. But "spider-sense" isn't infallible, at least in those of us who can't climb walls. So, here too, I want to take issue with a couple of points.

I think it's important to remember that contingency plaintiffs, in general, are not only liquidity constrained but relatively unsophisticated. Yes, that's one reason contingency fees can be useful: when lawyers are only paid if they win, it pays them to be careful about the cases they take and to be cautious about rejecting settlement and proceeding to trial. But the "screening function" in which the lawyer evaluates the merits of the case cuts both ways. Because an unsophisticated plaintiff is unable to evaluate the merits of his case, he has no idea if, for instance, it's a "slam dunk" that the insurance company is certain to settle for the policy limit. The lawyer does typically know that and is happy to take the case, on a standard contingency fee of 33 percent, to score a windfall at the plaintiff's expense. This potential for abuse is at the root of the contingency fee reforms that are focused on plaintiff protection -- admittedly different from the "blunt instrument" caps we're discussing. (Yes, I agree with you that percentile fee caps are a crude reform measure, as I said before. So are damage caps. But that doesn't mean they can't be effective.)

What we have when it comes to contingency fees is a market failure. Unsophisticated plaintiffs can't value their cases and therefore can't bargain with their attorneys over price. They can't shop on price -- they're too unsophisticated to know a good attorney from a bad one, and might indeed be suspicious that a "cheaper" attorney isn't as good, whether that's the case or not. Thus, as Lester Brickman has shown, there isn't really any price competition over contingency fees. Now I disagree with Lester's claim that the lack of price competition is likely due to collusion; as those of us with training in economics are well aware, collusive arrangements are very difficult to maintain and would be virtually impossible to maintain for a group as broad and varied as contingency fee lawyers. It's the very fact that plaintiffs in contingency fee cases have too little information and understanding to shop and negotiate on price that leads contingency fees to be set at a standard level.

So, there are ethical reasons to question the contingency fee, from the plaintiff's perspective. Unlike Professor Brickman, I tend to approach most of these questions from a law and economics rather than an ethical perspective, but the above-normal windfall from noncompetitively priced contingency fees almost certainly helps drive excess litigation.

Why is that? Well, let's start with Lester's seminal study concluding that contingency fee lawyers, on average, make above normal profits relative to their hourly brethren, even after adjusting for risk. I view that paper similarly to yours and Eric's on contingency fees: very useful work, but the wrong analysis. (I know I haven't yet laid out in detail why I think that is for your paper, but I will in my next post, as I said at the outset. I just want to get the main theoretical debate on the table first.) I find it hard to believe that contingency fee plaintiffs' lawyers, on average, make a risk-adjusted return higher than hourly attorneys, because if that were the case, hourly attorneys would switch to contingency work.

And that, I think, is just what has happened. Lester's study, importantly, looks at the top quartile of contingency fee lawyers. Some of those lawyers are indeed getting paid handsomely for risk, luck, or performance. Others are exploiting the information imbalance between plaintiffs and lawyers to get extra cash based on the absence of price competition over fees. But among the lawyers not in the top quartile, a lot are doing worse than hourly lawyers. They're often less skilled, in courtroom work, in preparation, in case screening, or even in advertising strategy. Still, they stick around chasing the big payoffs, at least as long as they can. The absence of price competition over contingency fees leads directly to more contingency fee lawyers -- and more lawsuits and cost to society.

Of course, the mere fact that there's a market failure need not imply a regulatory response. Far too often, those with too little respect for limited government ignore the cautions of public choice theory and the law of unintended consequences and rush to "correct" market imperfections with cures that are worse than the disease.

But so too is it the case that merely because we generally respect the law of contracts -- and indeed think that the substitution of the law of tort for that of contracts over time is a major underpinning of overlitigation -- we need accept every contractual arrangement. You admit as much in saying "we don't enforce contracts against the public interest." My argument is that contingent fee contracts, at least in some cases, can be just that, as I'll explain further in my next post.


Contingent Fees for Julia Roberts (and Erin Brockovich)

By Alex Tabarrok
Posted on April 11, 2006, 11:38 PM

Jim,

We both favor fee regulation where there is no bargaining between lawyer and client but we favor this for different reasons. I think fee regulation could modestly reduce some heavily padded lawyer fees. You think that fee regulation would substantively improve the tort system.

Movie stars also work on contingent fee (they get paid a share of the gross). Using your argument this causes them to go for films with a low probability of a high payoff – the potential blockbuster that alas is usually a dud. If we regulated fees so that movie stars could be paid only a straight salary that would certainly change how movies are financed. The studios (big law firms), for example, would become more important. A few actors (lawyers) would make less money but the average actor would make more (if you don’t give people a lottery ticket you have to increase their average salary). But would changing how actors are paid really improve the quality of the movies? I doubt it.

If you want better movies there’s only one solid method, attack the source of the problem, and raise the taste level of the public. If the public demands Armageddon that is what they will get. The same is true of improving the tort system – fiddling around with fees won’t do it – we need to address the substantive issues that give judges and juries a taste for bad law.

The unsophisticated plaintiff abused by the sharp lawyer is a classic rhetorical device. I’m sure it happens but there is a real tension in claiming on the one hand that contingent fees are so powerful they motivate lawyers to flood the courts with thousands of manufactured cases (and the plaintiffs are “happy to sign up”) and on the other hand argue that contingent fees are a form of plaintiff abuse.

If contingent fees really were a form of plaintiff abuse then we would expect sophisticated plaintiffs not to use contingent fees but in fact both the rich and poor, corporations and individuals, repeat players and one-time suers use contingent fees. In fact the trend today is to structure defense contracts on a contingent basis.

I agree that Lester Brickman has done very interesting work on contingent fees but, as you note, it is hard to believe his theory that there is collusion in the market for lawyers.

Brickman is also wrong about some of the facts. He likes to say, for example, that the return to contingent fee lawyers has increased by 1400 percent since 1960. As I showed in my paper “The Problem of Contingent Fees for Waiters” (The Green Bag, Summer 2005) this is implausible.

Brickman does not calculate lawyer income and its growth directly but reasons that “increases in average verdicts, adjusted for inflation, translate into proportionately higher annual incomes.”

A growth rate of 1400 percent since 1960, however, appears to be inconsistent with what we know about lawyer income today. The Bureau of Labor Statistics estimates median lawyer income in 2002 of $90,290. If lawyer income had grown by 1400 percent since 1960 this would imply a real ($2002) income in 1960 of just $6019. But GDP per-capita in 1960 was $15,075. Thus Brickman’s growth estimate implies (implausibly) that lawyers in 1960 were earning substantially less than the average person.

In contrast, Wolff (1976) estimated that income for “Deans, Lawyers, and Judges” in 1960 was $56,680 (in $2002 dollars) nearly ten times the figure implied by Brickman’s calculation. Using Wolff’s more realistic estimate I calculate that real income for lawyers has increased by 59 percent since 1960. Substantial, but a far cry from 1400 percent.

Let me end this part of our debate by quoting your wise comment:

Far too often, those with too little respect for limited government ignore the cautions of public choice theory and the law of unintended consequences and rush to "correct" market imperfections with cures that are worse than the disease.


Superstars, Lawsuits, and the Public Interest

By James R. Copland
Posted on April 12, 2006, 04:51 PM

Alex,

My intention today was to get fully into my critique of your article with Eric Helland, but after your most recent post, I again wanted to clarify some theoretical issues. To keep this entry at a readable length, I'm posting it first. I'll follow up tonight or in the morning with an analysis of your empirical findings.

In your most recent post, you draw an analogy between contingency fee arrangements and arrangements in which "superstar" actors and actresses -- like Julia Roberts -- get a piece of the eventual revenues from their movies. You then suggest that such forms of actor compensation are a major reason why we have bad, dumbed down "blockbuster" movies -- and argue that nevertheless we shouldn't regulate actors' movie contracts (that's an easy point of agreement!).

I don't think your analogy works on a number of levels. Studios, not actors, are the main drivers behind the "blockbuster" business model. They may be coming into question of late, but summer blockbusters have been the industry's staple since Jaws and Star Wars hit it big some 30 years ago. The blockbuster movie model predated actors' ability to get a slice of movie revenues, not the other way around.

Now, a limited group of actors has proven its ability to "draw" audiences based on reputation alone, and has thus gathered a piece of the pie (not on a true "contingency" basis but rather on top of a multimillion dollar guaranteed fee). But this group is a very limited one, and includes only the "top draw" actors like Tom Cruise, Julia Roberts, Reese Witherspoon, Will Smith, and a handful or two others. These artists get a stake in blockbuster movies' outcomes because they have negotiating leverage based on their unique human capital, a proven brand name that virtually guarantees ticket sales. But the run-of-the-mill actor doesn't get a percentage of the movie's profit. The "superstar actor" model, then, is very different from what we observe with contingency fee arrangements for lawyers, in which the vast majority of plaintiffs' lawyers in personal injury/ products liability/ medical malpractice cases work on a contingency fee -- at essentially the same standard 33% level.

Studios, unlike the vast majority of contingency fee plaintiffs, have no liquidity constraints when it comes to paying actors. They may get some improved performance out of superstar actors when they give them a piece of the pie, by inducing them to be more enthusiastic about promotional movie junkets. But that incentive effect is much more analogous to incentives offered to top corporate executives in the form of stock options than lawyer contingency fees; and with the exception of employers trying to wring union concessions via ESOP plans, stock options only go to key personnel.

So when it comes to clever but misleading rhetorical devices, I think the "actor superstar" analogy fits the bill. And, most importantly, it conveniently sidesteps the crucial difference between employee incentive arrangements in the free market and contingency fee arrangements in the legal market: litigation involves using government force to redistribute wealth, whereas movie sales involve willing consumers. If I pay for a movie, then I presumably value the experience more than the ticket price. I may sometimes be disappointed, ex post, just as I might be for a meal, a bottle of wine, or a basketball game. But going in, I expect to prefer the experience to the cash. The social planning instinct that underlies wanting "better movies" through contract regulations is of course silly to those of us with libertarian instincts -- and after all, in this day and age we can watch classic movies via Netflix or AMC; visit art house cinemas; or take in opera, theater, and the like.

But litigation is a different beast entirely. What the plaintiff and lawyer are contracting for is to take money from someone else. While it isn't quite the same as Tony Soprano paying a henchman to shake down a local business owner for "protection," it isn't always so different. Yes, in an ideal world, our legal system would be the perfect black box that only spit out awards to deserving plaintiffs, quickly and at low cost. But it isn't.

There are a couple key points that bear emphasis:

First, litigation costs society. Lawsuits are not just market transactions in which two parties both benefit, helping society apart from any negative externalities. Plaintiffs may be perfectly happy to give up one-third of their ultimate winnings to obtain financing and reduce attorney-client agency costs. But let's not forget that defendants and companies insuring defendants end up paying over one-third of all litigation costs. Moreover, market incentives are significantly distorted by the prospects of litigation. If you believe, a la Calabresi, that the courts are on average creating distortions that drive decision makers in the economy to reduce true "accidents" or social costs, at an efficient level, you're just fine with that (as long as the social costs reduced exceed the dead weight loss of the system). But if you agree with Peter Huber that such distortions are actually welfare and safety reducing (as the recent study by Paul Rubin and Joanna Shepherd tends to suggest), you've got an even bigger reason to worry about litigation's effects on our society.

Second, contingency fees increase the quantity and decrease the quality of litigation. I've suggested a couple of mechanisms through which this effect happens, which you consider to be in "real tension." Well, let's see. First of all, most contingency fee plaintiffs are unsophisticated, creating a market failure because there's no price competition over the fee. Apart from the Brickman studies previously cited, I think that the fact that fee percentages are not varied based on case risk (or in most instances attorney quality) is extremely evident to anyone with much familiarity with the legal system. As Walter Olson pointed out on Overlawyered yesterday, David Giacolone recently wrote extensively about this market failure on his blog, in much more detail than I have here. (I don't agree with everything he says, but it's very interesting.) In my view, the fact that there are a lot of cases in which attorneys on a contingency fee get high returns for little risk leads a lot more attorneys -- filing a lot more lawsuits, often dubious -- to enter the field. The latter attorneys do worse than their hourly fee brethren, but the end result is more lawyering, and more money for lawyers on both sides.

The second mechanism I suggest to explain how contingency fees drive up the quantity and reduce the quality of litigation is the very fact that contingency fee lawyers have a big incentive to file low probability, high value cases because they have a stake in the outcome. In your initial post you attacked this line of thinking in a couple of ways. First, you note that "the lawyer's client has exactly the same incentives (indeed, given a contingent fee of 1/3rd, twice as strong incentives!)." But that isn't really very compelling to me: remember, the plaintiff, just like Tony Soprano, may have lots of incentive to shake down a business, but that doesn't mean that society is better off if he does. It doesn't really trouble me that some plaintiffs who aren't liquidity constrained (and who are capable of assessing and monitoring their cases) might still find ways to file low probability cases. To begin with, the contingency fee from the outset was a mechanism for giving the poor access to the legal system. That the non-liquidity-constrained might prefer it, too -- because it reduces monitoring costs but also because it gives attorneys incentives to cut ethical corners -- doesn't in my view add much to the debate. And it isn't really in tension with the fact that some plaintiffs are abused, either: the corporations and rich folks who want contingency fee lawyers are almost certainly better able to protect themselves from their own attorneys' potential abuse.

Your second argument against my point that contingency fees encourage "low probability, high value" lawsuits is that "[n]ot all low-probability, high damages cases lack merit." Well, sometimes that's true (though I'd say that on average we witness the opposite effect -- that cases that really lack merit are high probability due to bad laws or rules, or judges' or juries' prejudices). But you wouldn't really argue that in our legal system good cases are on average very unlikely to win, would you? Even accounting for selection bias, that's hard to believe when over 50 percent of civil jury trials result in a plaintiff verdict. In reality, most low probability cases are low probability for a reason: the plaintiff shouldn't win (but might given a bad judge or jury). Recognizing that litigation costs society due to huge administrative costs and substantial distorting effects, as I explained in point 1, we really don't want those cases in court.

Finally, the fact that contingency fees create a direct and very powerful incentive for attorneys to bend the rules is a crucial point. Attorneys having a stake in the outcome gives them a strong inducement to generate fraudulent claims, fabricate evidence, and suborn perjury. Hourly fee attorneys are zealous advocates, for sure, but without a stake in the outcome of the case, their advocacy typically has real limits. If you don't believe that the contingency fee has an extremely powerful effect on attorneys trolling for clients, consider what Ted Frank reported on Overlawyered a couple weeks back: "Six of the eight most expensive Google AdSense search terms are for attorneys (the other two are for mortgage and loan refinancing), with 'mesothelioma lawyers' topping the charts at $54.33." And if you don't think that contingency fee lawyers haven't been manufacturing false claims on a grand scale, take a look at Janis Graham Jack's findings in the silicosis litigation (along with our commentaries), or what Judge Harvey Bartle found in the fen-phen litigation (summarized nicely in a recent Forbes article). I haven't heard of any silicosis or fen-phen lawyers working on hourly fees. But one thing's for sure: these cases are extremely costly to society.

In sum, I think the contingency fee is a primary cause of the litigation explosion. The contingency fee caps you and Eric study are a crude mechanism to be sure, but their problem isn't that they infringe on the right to contract but that they don't go far enough. Your empirical analysis, as you interpret it, directly undermines the arguments I've made above: you conclude that contingency fees on average improve case quality and lower the time it takes cases to settle -- presumably increasing the social welfare. I think you misinterpret your data, though, as I'll explain in full later tonight or in the morning.


By Alex Tabarrok
Posted on April 13, 2006, 01:33 PM

Jim,

A few quick points. You misinterpreted my argument about actors and contigent fees. Your argument is that contingent fees encourage low probability, high award cases which in your opinion are mostly bad cases. By analogy paying actors on contingent fee should generate low probability, high award movies (blockbuster attempts) which mostly also turn out to be bad.

I, however, don't believe the theory for either lawyers or actors and hence I wrote "would changing how actors are paid really improve the quality of the movies? I doubt it." Similarly, I don't think that changing how lawyers are paid will improve the legal system.

I'm glad, by the way, that you agree that contingent fees in movies have not generated bad movies. If they had that would have been support for your theory.

It's not so much that I disagree with the thrust of your analysis, however. It's that I think you significantly overstate the influence of contingent fees.

Tips are a type of contingent fee (you pay only if you like the meal and it's a percent of the bill). Since tips are a big fraction of waiter income, waiters have an incentive to steer customers to expensive and big items on the menu. I wouldn't argue, however, that tips have created America's epidemic of obesity. We don't want to confuse an effect on the margin with a big total effect.

In short, contingent fees are the explanation for neither America's excess consumption of tortes nor it's excess consumption of torts.


Drop by Drop

By James R. Copland
Posted on April 13, 2006, 03:19 PM

Alex,

OK, at long last I want to start getting at the substantive meat of your article with Eric Helland. Your article makes two key findings that lead you to conclude that in states with contingency fee caps, plaintiffs' lawyers switch to hourly fees and exploit their clients:


  1. You observe that in states with contingency fee caps, lawyers are more likely to drop cases they've filed; you interpret this finding as evidence that in those states more plaintiffs are suing using hourly fees, and -- being unsophisticated -- are duped by their lawyers into filing bad cases.

  2. You observe that in states with contingency fee caps the average time it takes a case to settle is longer; again, you interpret that finding as evidence that those states have more suits filed using an hourly fee, in which lawyers are stretching out their cases to rack up bills on their unwitting clients.

In this post, I'll set out my initial objection to your theory itself and offer an alternative explanation for your first result. I'll get to your second finding in my next posting.

In my view, your results are consistent with your theory that contingency fee caps cause lawyers to switch to more hourly work and thereby rip off their clients; but your theory is not the only -- or the most persuasive -- explanation of your results. The big problem I have with your theory (and its application to your empirical results) is that it doesn't match reality. Yes, some contingency fee litigation involves businesses that would switch to hourly rates on the margin when fee caps are imposed. But the overwhelming majority of contingency fee plaintiff cases exist in the American system solely due to the contingency fee itself; by definition, the clients lack sufficient liquidity and sophistication to hire hourly lawyers. Lester Brickman raised this essential critique in an AEI conference on your paper in 2004:

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.


I think Lester's right here. You basically pooh-pooh the point, arguing that it's "trivial economics": "Imagine that tips for waiters were banned. What would happen to wages? They would increase. No big surprise but apply the same idea to lawyer contingent fees and we get lots of objections."

But I think what you're going after here is a straw man. Of course substitution effects exist. Of course contingency fee lawyers would shift on the margin to hourly work if caps were imposed. The real question, though, is whether that hourly work would involve the same type of work the lawyers performed with the contingent fee. And on that question, I'd say no; rather, I'd say that on the margin you'd have fewer of the products liability, medical malpractice, and personal injury cases the contingency fee reform was designed to reduce. Lawyers couldn't afford to pursue as many of those cases, of the shoot-the-moon variety, with contingency fee caps. Nor would they have those very same plaintiffs lining up to pay them hourly rates for the same types of cases. I think what you'd see is lawyers substituting hourly work of a different variety -- trusts and estates, family law, real estate, transactional. The increase in labor supply in those fields of law would push hourly rates down over time, and ultimately on the margin induce some lawyers to substitute nonlegal for legal work, in essence giving up the sunk cost that was their legal education and experience.

If you can come up with contrary evidence here -- even anecdotal -- I'd love to hear it. Can you show that there are a lot of medical malpractice cases being filed using hourly fees in states with contingency fee caps, like New York, Illinois, and California? Since that supposition is the linchpin of your theory, it would be nice to see even a quantum of evidence that lawyers are behaving consistent with your theory in the real world.

With that said, I'll move on to interpret your analysis of case drops.

Dropping the Ball: An Alternative Interpretation of Higher Case Drop Rates in States with Contingency Fee Caps

Chapter 5 of Judge and Jury, and the AEI paper on which it's based, are laymen's versions of a 2003 article you and Eric published in the Journal of Law, Economics, and Organization, available at 19 J.L. Econ. & Org. 517 ($). Your first major observation is that among medical malpractice cases filed in states in which contingency fees are capped, "18.3% of medical malpractice cases are dropped, but only 4.9% are dropped" in states without contingency fee caps. 19 J.L. Econ. & Org. at 531. You also look at what happened in the state of Florida before and after contingency fee caps were imposed and observe "a 15% increase in drops" after the caps were put in place.

I should note to our readers that your technical paper includes much more sophisticated analyses than the laymen's version in Judge and Jury. Specifically, you and Eric run two more sophisticated tests -- econometric regressions -- to see if the observed increase in drop rates still holds once you control for other factors. (Your methodology for analyzing your data across states is quite ingenious, I might add: you control for variation across states by observing differences between medical malpractice cases, in which fees are capped, and auto accident cases, in which they're not.) On one of your two cross-state tests, and on your Florida test, you find again that drop rates are significantly higher when contingency fee caps are in place.

Well, at first blush, this doesn't look too good for Copland's theory, does it? I mean, I hypothesized that by reducing the effective rate of return for attorneys who file low probability, high dollar claims, you'd improve overall case quality. On the surface, then, it doesn't make much sense that you'd see more dropped cases when states had caps on fees.

But let's step back a minute. As I noted in my first post, a rational plaintiffs' lawyer (risk neutral, with a diversified portfolio of cases) will accept a contingency fee case if and only if:

F*Pr*D > C

Where

F = contingency fee ratio,
Pr = probability of success at trial,
D = expected damages at trial, and
C = cost of pursuing and trying case.

As I noted then, however, it's crucial to realize that the probability of success at trial and expected damages at trial are best viewed as ranges, not certainties, and that in any event they are not constant over time. Herein, I think, lies the most plausible explanation of your findings.

Why is that? Well, the probability of a case's success, from the perspective of the plaintiff's lawyer, varies over time. Litigation involves various stages:


  1. Pleading. In the United States today, the dominant rule is "notice pleading," in which "the plaintiff is required to state in their initial complaint only a short and plain statement of their cause of action. The idea is that a plaintiff and their attorney who have a reasonable but not perfect case can file a complaint first, put the other side on notice of the lawsuit, and then strengthen their case by compelling the defendant to produce evidence during the discovery phase."

  2. Discovery. Here the parties exchange information in "the pre-trial phase in a lawsuit in which each party through the law of civil procedure can request documents and other evidence from other parties or can compel the production of evidence by using a subpoena or through other discovery devices, such as requests for production and depositions. In American law, discovery is wide-ranging and can involve any material which is relevant to the case excepting information which is privileged or information which is the work product of the other side."

  3. Summary Judgment, Settlement, or Trial. The parties look for the judge to rule for one side or the other as a matter of law, they try to settle the case, and if all else fails they go to trial.

Viewing cases in this light -- how they actually occur in practice -- helps us to see what I think is actually going on here. Notice pleading is very, very cheap for the plaintiffs' lawyer. All a plaintiffs' lawyer has to do is pull up his template on Microsoft Word, alter a few names, dates, and phrases, and -- voila! -- notice is served. The plaintiffs' lawyer can then demand that the defendant produce documents, attend depositions, and the like.

And herein lies our answer. When a plaintiff first walks into the lawyers' office -- having seen that ad telling him he only need pay if he wins -- all the lawyer can observe is the plaintiff's level of injury. He cannot determine with any certainty whatsoever how likely he is to win at trial: that involves proving causation, i.e., that the plaintiff's injuries were caused by the doctor or hospital; and fault, i.e., that the doctor or hospital was negligent in causing those injuries. At the outset, when he signs up the plaintiff and assumes the minimal expense of filing the case, he only has his perception of the plaintiff's credibility to go on.

But once the defendant files a reply and discovery starts, it's a whole new game. Now the plaintiffs' lawyer starts to get a lot more information about what went on from the defendant's point of view. He starts to figure out just what the defense is probably going to look like at trial. So he readjusts his probability range, upwards or downwards, in a narrower band, based upon the information he has received.

Once we view the problem this way, it should come as little surprise that we see higher drop rates in cases in which we have contingency fee caps. At the outset, whether a state has contingency fee caps or not, lawyers sign up cases if the damages are sufficient that it might be worth their while to go to trial. Once the lawyers get more information as the legal process continues, they have a better estimate of the cases' real value. For any case, if the new expected value based on better information is below the expected cost to try the case, the lawyer drops the case. If the damages are really great, some low probability cases might still survive -- consistent with your strong empirical finding using the Florida data that cases with "permanent and grave" injuries were much less likely to be dropped. But for a significant subset of low probability cases, the expected value, once you have good information, is too low to justify pursuing when you have a cap on contingency fees but still worth taking a shot at if you have unlimited contingency fees. So you have more dropped cases in states with contingency fee caps precisely because the caps work as expected: once information emerges that refines the probability assessment for the plaintiffs' lawyer, he's more likely to drop the weaker cases.

In my interpretation of your results, then, contingency fee caps do work to eliminate bad claims. Because my interpretation is much more consistent with what we actually observe on the ground -- namely, that the relative merits of a case only emerge with any precision for the plaintiffs' lawyer after the claim is filed, and that we simply don't see lawyers pursuing med-mal cases on an hourly basis in states with contingency fee caps -- I think it's far more compelling than the explanation you give.

The legal profession is necessarily detail-oriented, and lawyers quite regularly miss the forest for the trees. But economics is necessarily a simplifying profession, and we must be vigilant to ensure that those simplifications make sense. When the assumptions of our economic models don't match reality, we can reach bad results.


Putting Two Theories to the Test

By Alex Tabarrok
Posted on April 14, 2006, 01:42 AM

Jim,

Your last post does a really impressive job of explaining both the theory and results of my Journal of Law and Economics paper (19 J.L. Econ. & Org. 517) with Eric Helland. Thanks!

Lawyers do find our proposition that restricting contingency fees will cause lawyers to turn towards hourly compensation difficult to accept. Part of the problem, however, is that Helland and I should have spelled out more clearly that by "hourly compensation" we simply mean non-contingent compensation. Hourly compensation doesn't have to be literal payment by the hour, instead it can be cost-sharing. In legal cases of all kinds there are costs (deposition costs, discovery costs, witness cost etc.) Lawyers paid on contingent fee sometimes bear these costs but they need not do so and there is quite a bit of flexibility in how these costs are assigned. (This is another reason, by the way, why the apparent inflexibility of the nominal contingency fee near 1/3rd can actually mask fairly flexible total payments.) Is it so hard to believe that when contingent fees are restricted there will be greater cost sharing? I don't think so.

Now let's turn to your alternative theory. Once again, I am impressed. Your comments are the most sophisticated that we have received on this paper. I found especially useful how you laid out the order of pleading, discovery, judgement, this all makes a lot of sense. Indeed, I agree that the theory you outline can explain the same results that we presented in our paper.

Thus, we have two theories that can explain the same set of results. What do we do now? I am tempted to say that at this stage a lawyer rests but an economist gets to work! The two theories have the same implication for drops but what else do they predict? Can we find some other testable proposition that the theories disagree upon?

Here is one answer. Our theory says that when contingent fees are restricted lawyers take on bum cases that they would not have taken on under contingent fees (these cases are then dropped as plaintiffs figure out that they are wasting their money). Our theory, therefore, implies that expected awards should decrease when contingent fees are restricted. More bum cases under c. fees thus lower expected awards (lawyer income doesn't necessarily fall since they get more hourly compensation but there are more bum cases so expected awards will be lower.)

Your theory says that when c. fees are restricted lawyers take on the same initial set of cases but then they drop weak cases that they would not have dropped under c. fees. Thus, your theory implies that expected awards should increase when contingent fees are restricted. That may surprise you but I think the reasoning is right. Since it's the weak cases which are being dropped the cases that remain must have higher expected value.

Ok, so what do we find? I went back to our data from Florida but instead of looking at drops I ran the same regression (with all the control variables) on awards. I had not previously run this regression or if I had I did not remember the results.

The regression says that after limits are put into place expected awards decrease by about 30-50 thousand dollars. The decrease is statistically significant.

Well, it's 2:30 in the morning so take the results with a grain of salt but as for me I think I can now sleep peacefully.


Time Warp

By James R. Copland
Posted on April 14, 2006, 06:13 AM

Alex,

First of all, thank you for your gracious response to my last posting. This type of give-and-take is exactly what we hope for in our Point of Law featured discussions. And I must say I'm flattered by your reaction to my thoughts -- not only your words of praise but also you actions, i.e., that an economist of your stature would actually run a new regression at 2:30 in the morning to generate an immediate response.

Since we do have two competing theories, the answer is ultimately empirical. And I don't know that we'll be able to come to a clear answer this week; I expect that this discussion could have some useful offshoots going forward. I'm pulling together this response quickly myself at 6:30 in the morning -- before heading to the airport, and I'm not generally a morning person -- so don't hold me to this snapshot reaction as if I'd given the matter extended thought; but here's my immediate take on your new regression results.

I agree with you that your theory does match the assumption that after a contingency fee cap is imposed, expected awards would decrease -- given that you postulate that plaintiffs' lawyers switch to hourly fees and exploit their clients by milking them through more bad cases being filed and more billing, i.e., time spent, per case.

I'm not sure though that in my view of the world, I'd expect average awards over all cases to increase. For any given case picked up, I'd expect that to be true after the drop decision, holding attorney behavior and other legal rules constant. The first clause there -- "for any given case picked up" -- is important: because although the screening mechanisms for lawyers pre-discovery are crude (the very foundation of my theory vis-a-vis the drop results), they're not non-existent. Lawyers, or at least good lawyers, certainly know on average how likely various types of cases are to win or lose, and how big an award they're likely to generate, based on certain characteristics. Although you pick up a lot of these characteristics as independent variables in your Florida regression (i.e., the basic severity of injury, the type of practice, and the type of defendant), there are undoubtedly factors missing. And in any event, there are significant factors to consider for the Florida data that could be affecting those results.

Crucially, as you and Eric notice, there was a "rush to file" in Florida prior to the November 1985 filing deadline, before the contingency fee caps went into place. Florida lawyers certainly seemed to think that the fee caps made a difference. Given the structure of the fee caps in Florida, which only kick in at $1 million (more on that later), it's very likely that these cases rushed to the courthouse were of the really-high-dollar variety. Today, those would be infant birth defect cases and the like; I'm not sure what they be in Florida in 1985, but it wouldn't surprise me at all that attorneys' rush to file such cases before the fee caps kicked in would overwhelm the discovery screening effects.

Perhaps even more important than this rush to the courthouse effect, it's important to consider the other "confounding problem" you and Eric note about the Florida data:

Florida enacted another series of reforms in 1986, the first of which took effect in 1987. These reforms included limiting contingency fees in nonmedical malpractice cases, eliminating joint and several liability, capping non-economic damages, instituting a period payment schedule for large awards, implementing a collateral sources offset rule which reduces the amount of the award by payments from other sources, and capping punitive damages.


19 J.L. Econ. & Org. at 531-32. Given that damage caps certainly could effect award outcomes, these changes might be a significant explanatory factor for the fall in awards, assuming that the damage caps kicking in starting in 1987 would affect a larger subset of the cases filed in the 10 months after the November 1985 deadline than those filed in the 10 months before. Without your full dataset and without a lot of time to consider the issue -- I've only just reread your section with the Florida data specifics -- I'm going to stress again that this reaction is tentative. But I do think that there could be other reasons for a fall in average awards in the Florida dataset other than the contingency fee cap itself.

Time to Settlement: Theoretical Issues

Now I want to look at the second major empirical finding in your contingency fee paper, namely that in states with contingency fee caps, we see an increase in the time it takes to settle a case. You and Eric conclude that this phenomenon is explainable through your hourly-fee theory, i.e., that in states with contingency fee caps, plaintiffs' lawyers switch to the same types of cases on an hourly basis -- and stretch out the time to settle so that they can charge more billable hours to their poor unknowing clients.

Having observed hourly-fee attorneys in action, I'd be the first to concede that each marginal hour of work billed isn't necessarily in the client's self-interest in terms of the value added to the case. I'd also admit, as I did at the outset, that contingency fees help mitigate this incentive misalignment; the incentives for contingency fees on average tend to run in the opposite direction -- the attorney wants to get as much as possible, yes, but for as little work as he can.

But just because I agree with you that hourly-fee lawyers have an incentive to string out cases when they shouldn't, and contingency fee lawyers have an incentive to settle on the cheap and move on to the next case, doesn't mean I buy the theory you and Eric advance. Again, I know of no evidence that lawyers in New York, Illinois, or California are doing significant amounts of medical malpractice litigation on an hourly basis. In your most recent post, you acknowledge that rather than switching to a pure hourly fee, lawyers might shift from a pure contingency fee to other forms of cost-shifting. That's slightly more persuasive to me, but I'd still want to see some real evidence that we see this in practice -- for the med-mal cases you're analyzing -- before I bought into it very much.

Before I get into the specifics of your empirical analysis, let me delve a bit into what we'd expect to see if we accept my alternative view of the world. I don't think that there's a clear theoretical prediction about the effects of contingency fee caps on settlement time. On the one hand, by giving lawyers an incentive to weed out bad cases, contingency fee caps increase the number of dropped claims, as you observe. That trend would directly reduce the time to settlement. Moreover, lawyers working on an unlimited contingency fee, the expected return is higher all else being equal. Thus, it's worth it to invest more time in any given case -- and we'd expect contingency fee caps to lead to quicker settlements.

But other factors would seem to cut the other way. Specifically, the very incentives that cause plaintiffs' lawyers to be more cautious about taking weak cases in states with contingency fee caps, due to the reduced upside, are also likely to encourage lawyers to be more careful about discovery in general -- thus spending more time on the average case. Also, while contingency fee lawyers should be more risk neutral than their clients, they aren't generally going to approach pure risk neutrality except for megafirms with broad portfolios of cases, like the Milberg Weiss securities firm. So if I'm right that contingency fee caps increase the average probability of case success, then we'd expect to see an increase in settlement time; with uncapped contingency fees, risk averse attorneys with more long-shot claims are more likely to cut and run for the cheap settlement.

Those aren't the only arguments out there, but it's obvious that it's not wholly clear to me in which direction we'd expect contingency fee caps to influence settlement time in my view of the world.

Time to Settlement: The Florida Data

You and Eric observe that the time it took to resolve a case increased in Florida after contingency fee caps went into place in November 1985. In your regression analysis, you control for the stock of cases -- thus holding constant court "congestion effects" that may have occurred due to the "rush to file" before the caps took effect. With that control, the increase in time to settlement remains statistically significant.

Rather than reflecting attorneys' switching to hourly fees starting in November 1985, and bilking their clients, I'd guess that this effect has much more to do with the way the Florida reform was actually structured. The main Florida caps only kick in at $1 million. That's around the median jury verdict today, but well above it in 1985. Indeed, Lester Brickman observes that in 1984 the mean med-mal jury verdict nationally was just over $900,000 in 2001 dollars (at p. 710). The median is certainly a good bit lower than that (means are driven upward by large outliers in tort cases), the inflationary effects from 1984 to 2001 are substantial (but not worth my while to calculate since it's not central to my argument), and Florida may well have had lower verdicts on most cases than the rest of the country (since its cases are disproportionately brought by seniors, who have lower economic damages than cases brought by earners in their prime). The point here is that Florida's capping of contingency fees above $1 million is not likely a good explanatory factor for the increase in time to settlement you observe.

What may well be a good explanatory factor is the way Florida structured its fee limitations below $1 million. Fees were capped at one-third for recoveries through the time of filing an answer or a demand for arbitration; but fees were only capped at 40 percent from that point through the trial of the case. Assuming lawyers in Florida took advantage of this statutory cap and structured it into their fee arrangements after November 1985 when the law went into effect, contingency fee lawyers in Florida faced a direct inducement to string out cases beyond the filing of an answer or arbitration demand because they'd take home a bigger piece of the pie. That perverse incentive probably goes a long way toward explaining the results you observe.

Time to Settlement: The Cross-State Data

Like your time-series analysis in Florida, your cross-state analysis also finds that the time to settlement increases in states that have contingency fee caps. Again, though, I'm not convinced that this observation results from attorneys in those states bilking their clients using hourly fees, rather than other factors.

Specifically, I think your observed results are a function of anomalies in your data set. You draw from the 1992 sample of data from 75 large metropolitan counties in a Bureau of Justice Statistics report. When looking at Appendix table 2 (p. 8) of the report, I immediately notice the very long processing time in 2 of the 3 largest counties in your "contingency fee cap" states, namely New York, NY, and Cook, IL (Chicago). Cook County is a notorious "judicial hellhole," and a prominent left-wing litigator has called the Bronx civil jury "the greatest tool of wealth redistribution since the Red Army."

On a hunch, I looked at the summary data for civil jury results in the 1992 survey, presented in this BJS report. I looked at the 4 counties in your "cap states" with 200 or more civil jury trials in the sample -- the two aforementioned MSAs plus Los Angeles and Orange counties in California. I then examined the 7 counties in the "non-cap states" with 200 or more civil jury trials: Hennepin, MN; St. Louis, MO; Cuyahoga, OH; Philadelphia, PA; Bexar, TX; Dallas, TX; and Houston, TX. What I found confirmed my suspicions. The large counties in the "cap" sample had juries more likely to award for the plaintiff (54 percent to 50 percent), thus reducing risk to the attorneys (and reducing the incentive for attorneys to "cut and run" through early settlement). The "cap" counties had higher average verdicts ($834,000 to $697,000), thus increasing the expected return to attorneys (and increasing the amount of time a reasonable attorney would spend working on a case). And, significantly, the "cap" counties had a higher percentage of plaintiff winners getting a verdict of $1 million or more (14 percent to 8 percent) -- again, increasing the percentage of cases for which contingency fee attorneys would be willing to work more hours on a case, caps notwithstanding.

Of course, these data differences also show up in your summary data showing that the "cap" counties have higher average awards than "non cap" counties -- and indeed, that the differential is greater in med-mal cases than in auto cases (unsurprisingly, since the high-end med-mal verdicts bumping up the mean will be relatively larger than the biggest auto cases). But all that tells us is that contingency fee caps -- or more precisely, the caps imposed in these states -- are not sufficient to ameliorate the tort system's problems entirely. I don't think any reasonable person would claim otherwise.

But what your analysis tells us is that even these caps can have a significant effect in screening undesirable cases, to the tune of inducing a higher drop rate of around 15 percent. That's nothing to sneeze at.


Agreeing to Agree

By Alex Tabarrok
Posted on April 14, 2006, 12:35 PM

Jim,

Are you sure that you are not an economist? (Only an economist would intend that question as a compliment but that is my intention!). Empirical researchers and graduate students should take note of your last post because you have given them plenty of grist for the mill.

I often tell my students to evaluate literatures not papers because no single paper is definitive. Truth emerges more slowly through the give and take of the scientific process. I think we have seen some of that process in action with this week's debate. I've certainly learned a lot and am always delighted to come away with more ideas for future papers. Thanks!


Thanks Alex!

By James R. Copland
Posted on April 17, 2006, 12:01 AM

Alex,

Believe me: I definitely take your asking me if I'm an economist as a compliment. (It's when people ask me if I'm a lawyer that I sometimes take offense!)

It's been a pleasure having you at Point of Law over the last week for this featured discussion. I'm sure our readers found it interesting and gained new perspectives on contingency fees and empirical research in law and economics. As I said at the outset, the work you and Eric Helland have done is extremely thoughtful and offers a great deal of leadership to the debate over legal reform. I hope our readers will check out Judge and Jury and get a picture of the entirety of your outstanding research to date.

Thanks -- and I look forward to continuing these discussions going forward.

Jim

 

 

 

 

FEATURED DISCUSSION ARCHIVE:


Obamacare Decision: Reactions, July 2012
Law School Faculty Diversity, May-June 2012
Class Actions, May 2012
Constitutionality of Individual Mandate, March 2012
Human Rights and International Law, February-March 2012
The constitutionality of President Obama's recess appointments, January 2012
Do caps on medical malpractice damages hurt consumers?, December 2011
Trial Lawyers Inc.: State Attorneys General, October 2011
Wal-Mart v. Dukes, April 2011
Kagan Supreme Court nomination, May-June 2010
Election roundtable, November-December 2006
Who's the boss, September 2006
Medical judgement, July 2006
Lawyer Licensing, May 2006
Contingent claims, April 2006
Smoking guns, July 2004

Isaac Gorodetski
Project Manager,
Center for Legal Policy at the
Manhattan Institute
igorodetski@manhattan-institute.org

Katherine Lazarski
Press Officer,
Manhattan Institute
klazarski@manhattan-institute.org

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