Washington University Law Quarterly

Fall 2002

2002 Institute for Law and Economic Policy Litigation Conference

Litigation in a Free Society

*739

SEVEN DOGGED MYTHS CONCERNING CONTINGENCY FEES

Herbert M. Kritzer [FNa1]

Copyright © 2002 Washington University; Herbert M. Kritzer

Introduction

One of the hallmarks of litigation in the United States is what we call the contingency fee. Given the alleged litigation explosion in the United States [FN1] and the supposed litigiousness of the American populace, [FN2] the contingency fee is a frequent target of the proponents of so-called tort reform who seek to reduce both the exposure to lawsuits and the amounts paid out in damages. [FN3] *740 One recent example targeted by critics is the huge fees received by lawyers representing states in the health-care cost tobacco litigation. [FN4]

The goals of these supposed reformers were clearly brought home to me in December 2001. I received a telephone call from an attorney representing a large American corporation. The company had produced a product that had caused a significant number of deaths in several countries outside the United States. Importantly, as the lawyer described the situation to me, there was no real question about liability; the concern was to minimize the damages to be paid out. This had become important because a number of American attorneys were seeking to sign clients from these countries to contingency fee retainer agreements in order to sue the American company in courts in the United States. The lawyer who contacted me was trying to find someone to whom public relations people working on behalf of his client could refer media representatives from the foreign countries; the lawyer's intention was to get the word out about "how bad contingency fees were for the clients" and "how it was often the case that clients ended up with very little after paying the lawyers their exorbitant fees." I told the lawyer who called me that I would be happy to talk to any media people who contacted me, but I would not be able to convey the message his client wanted to get into circulation. [FN5]

Proponents of so-called reform have propounded a variety of criticisms of contingency fees, along the way creating a variety of myths about the nature and operation of contingency fees. Here, I demonstrate that the most frequently advanced myths are just that--myths. In particular, in the pages that follow, I examine the following assertions:

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• Contingency fees are peculiarly American.
• There is in reality little risk to the attorneys in most contingency fee cases because most cases result in some recovery for the client.
• The use of modern advertising techniques by contingency fee lawyers has produced a flood of clients seeking compensation.
• Contingency fee lawyers accept most cases that potential clients bring to them.
• Contingency fee lawyers charge a "standard" fee of one-third of the recovery.
• Lawyers routinely obtain windfalls from contingency fee cases.
• The interests of contingency fee lawyers and theirclients are routinely in conflict.

In the discussion that follows I draw upon a variety of sources of data, both published and unpublished. My most important source of unpublished data is a study I have conducted of contingency fee practice in Wisconsin. [FN6] I also draw on data from the RAND Corporation's evaluation of the 1990 Civil Justice Reform Act. [FN7] Before turning to the seven myths, I briefly describe these two studies.

The Wisconsin Contingency Fee Study

My primary source of original data is my study of contingency fee practice in Wisconsin. To obtain direct and current information on contingency fees, this study involved a variety of types of data collection:

• a structured survey of contingency fee practitioners to obtain basic descriptive information about the lawyers' practices and information on a sample of cases handled by the lawyers;
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• observation of lawyers at work to obtain an in-depth understanding of key processes such as case screening and negotiation; and
• semistructured interviewing to ascertain whether the observational findings are sui generis.

The survey of contingency fee practitioners, which was carried out during the fall of 1995, relied upon a sampling frame defined by the Litigation Section of the State Bar of Wisconsin. [FN8] Lawyers provided a total of 511 usable responses representing an estimated response rate of 48%. [FN9] To obtain information on a sample of actual cases, the survey requested data on up to three cases: the case closed most recently after a trial had begun, the case closed most recently after filing but before the start of trial, and the case closed most recently before filing. Requesting data on the "most recent" cases in each category provides an approximation to random sampling, and the three different disposition stages provide for stratification along the key dimension of when a case is closed. [FN10] Overall, lawyers provided information on 989 cases (332 unfiled, 390 filed but not tried, and 267 that went to trial).

My observations in law offices during 1996 involved three different practices. [FN11] I was excluded from very little that was relevant to my work. [FN12] The three settings were very different. One was a specialist plaintiffs' firm, one was a contingency fee plaintiffs' specialist in a medium- sized general-practice firm, and the other was a litigation (broadly defined to include criminal, civil, and family litigation) specialist in a small general- practice firm.

Finally, I conducted a total of forty-seven semistructured interviews, twenty-eight with contingency fee practitioners, thirteen with litigation *743 defense lawyers, and six with current or retired insurance claims adjusters. I conducted the interviews between May and October 1996. I drew the sample of contingency fee practitioners using a combination of legal directories and Yellow Pages advertisements. These interviews averaged about one hour in length, and all were tape recorded and transcribed. I identified the defense-side respondents from directories and in the course of interviews with other respondents. [FN13] These interviews were conducted by telephone and were also, with one exception, tape recorded and transcribed.

Civil Justice Reform Act Study

The second source of unpublished data that I use is a study conducted by the RAND Corporation of federal civil cases. RAND conducted this study under contract with the Administrative Office of the U.S. Courts as an evaluation of the impact of the Civil Justice Reform Act (CJRA). For my purposes, I have employed data from two separate samples drawn by RAND. [FN14] The first sample is from cases terminated during 1991 (up to December 15); the second is from cases filed in 1992 (and in some situations 1993). Cases were taken from twenty federal districts around the country, some of which were involved in pilot projects under the CJRA and some of which served as comparison districts. Samples were stratified to include adequate numbers of cases for each of the types of case-processing interventions adopted in response to the CJRA and to include adequate numbers of cases in each of the three categories of work burdens placed on federal judges; asbestos cases were specifically omitted from the study. RAND constructed sample weights to comparisons to take into account variations in sampling rates. Each of the two samples (1991 terminations and 1992-93 filings) contained approximately 5,000 cases. Surveys of the lawyers involved in each case were then carried out (omitting the 7% of cases from the 1992-93 sample that were still pending as of January 1996 when the final surveys were sent out); the response rate from lawyers was around 50%. [FN15] A total of 742 respondents from the 1991 sample reported being paid on a contingency fee basis, and as did 603 respondents for the *744 1992-93 sample.

Questions on the lawyer survey captured information on the amount of time spent by lawyers on the case (Question 9A); legal fees paid by the lawyer's client excluding expenses (Question 27A); the amount at stake ("the best likely monetary outcome"--Question 16B); the numbers of years the lawyer had been practicing law (Question 28); the percentage of the lawyer's practice devoted to federal district court litigation during the previous five years (Question 29); and the size of the lawyer's firm (Question 30). [FN16] The ways some of the questions were asked would tend to provide underestimates of the amount of lawyer effort involved (some respondents could not provide estimates of the hours worked by all attorneys for their client and hence provided only partial estimates of lawyer effort, and lawyers were instructed to exclude the number of hours devoted to proceedings before administrative agencies or in state courts involving the dispute in the federal court case) and overestimates of the fees they received (the fee question asked for the fees paid for all lawyers for their client). The result is that effective hourly rates and mean hourly returns may be overestimated in the analysis based on the CJRA data that I report below. The information on hours and fees required for analysis was available for 392 (weighted) respondents from the 1991 sample and 297 (weighted) respondents for the 1992-93 sample. [FN17]

In addition to the data from the lawyer survey, I was able to draw on data RAND researchers coded from the court records. The key variables from the court records are the type of case as indicated by the plaintiff's lawyer at the time of filing and the stage of processing when the case was terminated.

Myth 1: Contingency Fees Are a Uniquely American Phenomenon

Contingency fees have a long history in the United States. One scholar has found evidence of such fees as far back as the early nineteenth century, [FN18] although the widespread use of such fees did not come until much later. [FN19] A popular perception both inside and outside the United States is that it is contingency fees that set the United States apart from the rest of the world. [FN20]

*745 In fact, contingency fees--by which I mean "no win, no pay" fees--are not unique to the United States. Some form of legally accepted "no win, no pay" fee exists in a number of other countries:

• All provinces of Canada except Ontario permit such fees, [FN21] some for over 100 years; [FN22] since 1992 Ontario has permitted them in class action cases. [FN23] At least some of the provinces permit percentage-of- recovery contingency fees. [FN24]
• Scotland has long permitted lawyers to act on a "speculative basis." If the plaintiff wins, he or she pays the lawyer the normal fee, but the plaintiff pays nothing if he or she loses. [FN25]
• In Northern Ireland, "speculative fee arrangements have operated unofficially . . . for many years." [FN26]
• In the Irish Republic, barristers take cases on a "no goal, no fee" basis, in which the barrister receives his or her normal fee unless no recovery is obtained. [FN27]
• In New Zealand, both barristers and solicitors may charge on a "speculative basis." [FN28]
• Australian courts began to recognize the appropriateness of "no win, no pay" fee arrangements in 1960, although it was not until 1994 that such fee arrangements started to be available for *746 potential litigants in certain types of cases (e.g., product disputes) in any type of routine way. [FN29]
• In France, major Paris law firms are using contingency fees increasingly, [FN30] and they are now being permitted to base fees in part on results achieved. [FN31]
• While few auto accident cases in Japan lead to law suits, in those cases that do go to court, the lawyers (bengoshi) representing the claimant normally charge on a contingency ("no win, no fee") basis. [FN32]
• Since 1995, English solicitors could charge clients in a growing variety of cases on a "conditional fee" basis in which the client pays nothing if no recovery is obtained and pays an "uplift" of up to 100% over the normal fee if there is a recovery. [FN33] In 1999, the government moved to greatly expand the use of conditional fees in order to reduce the cost of legal aid, [FN34] and under provisions of the Access to Justice Act 1999, successful plaintiffs can now recover the "uplift" from the defendant. [FN35] Furthermore, in a 1998 decision, the Court of Appeal in England ruled that it was not contrary to law for English solicitors to act on a contingency basis whereby the solicitor would forgo some or all of his or her normal fee if the case was not successful. [FN36] Most recently, serious discussion has *747 begun about the possibility of adopting percentage fees such as those used in the United States. [FN37]
• Greece permits percentage fees much like the American contingency fee, but with a limit of 20% of the amount recovered; [FN38] Greece also allows lawyers to consider the result achieved in setting a fee. [FN39]
• The Dominican Republic allows percentage fees much like those in the United States; such fees, called cuota litis, are limited to no more than 30% of the recovery. [FN40]
• Several countries permit elements of contingency (i.e., fees based in part on results achieved). In Italy this supplementary fee is called the palamario. [FN41] Other countries that permit this include Luxembourg [FN42] and Portugal. [FN43] Brazil allows fees that include a contingency/percentage element. [FN44]

As the above listing shows, each country's system is somewhat different. Nonetheless, the assertion that contingency fees are peculiarly American is clearly false. Moreover, even an assertion that the percentage-based contingency fee is specific to the United States is not correct.

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Myth 2: Most Contingency Fee Cases Involve Little Risk for Lawyers

While there are some areas of litigation where lawyers face substantial risk of nonrecovery and hence no fee if a case is being handled on a contingency fee basis, [FN45] most contingency fee cases do yield some recovery and hence some fee. However, this assertion misses the real contingencies of contingency fee practice. For both the lawyer and the client, recovery or no recovery is only one part of the uncertainty inherent in litigation. The other contingencies faced by the lawyer (and the client) include:

• uncertainty about the amount that will be recovered (and hence the fee the lawyer will receive);
• uncertainty about what it will cost, in both effort and expenses, to obtain the recovery; and
• uncertainty about how much time will pass before the recovery is obtained.

In fact, for most cases the real contingencies are not whether there will be a recovery but these other areas of uncertainty.

It is easy to understand the importance of uncertainty over the amount to be recovered and the cost of obtaining the recovery by imagining a first meeting between a lawyer and a potential client. Perhaps there is no issue at all of liability; the lawyer's client was a pedestrian on the sidewalk who suffered a soft-tissue injury and bruises while dodging a car driven by a well-insured driver who was convicted after the accident of driving under the influence. The lawyer might say to the client at the first meeting (ignoring ethical strictures against such a statement), "I can guarantee that I will get a recovery for you." The lawyer then asks the client whether she would rather pay the lawyer on an hourly basis at $125 per hour due monthly or on a percentage basis at 33% payable at the conclusion of the case. Almost certainly the client would then ask the lawyer two questions: "How much would your fee be on an hourly basis? How much do you think you will recover for me?" To this, the lawyer might well respond, "I can't say with a lot of certainty either how much the fee would be on an hourly basis because *749 that will depend on how difficult the other side is in settling the case, and whether we have to file suit. I also can't say for sure what the recovery will be; you are still in treatment, and the recovery will depend on whether you have any continuing problems or fully recover from your injuries." The client might then ask the lawyer for a worst-case scenario, to which the lawyer might say that the recovery could be as little as $5,000 if the client's medical condition resolves itself quickly and there is no residual problem. The lawyer would also respond that, if it is necessary to file suit, that would involve at least twenty to twenty-five hours of the lawyer's time, and two or three times that if the case actually has to go to trial. A little quick arithmetic on the part of the client would show that with a trial (albeit this is very unlikely [FN46] ) the lawyer's fee could exceed the amount recovered. Even without a trial, the client could end up with very little after paying the lawyer $125 per hour. Moreover, the client has to come up with the lawyer's fee as the case progresses, rather than waiting until the end. With all of these considerations, most clients would choose the contingency fee over the hourly fee.

While I have presented the above from the viewpoint of the client choosing between hourly and contingency fees, it also serves illustrate the uncertainty for the lawyer taking the case on a contingency fee. The lawyer needs to be prepared to accept a fee that yields a low return on the lawyer's investment. One of the lawyers I observed settled a case on the eve of trial for $60,000, having started out with a demand for $200,000. The lawyer, who had a nominal billing rate of $175 per hour, had devoted about 300 hours to the case. While the lawyer did receive a fee of $20,000, about $8,000 of this went into time devoted to the case by the lawyer's paralegal. In the end, the lawyer netted about $40 per hour. From the viewpoint of the lawyer, this case was a clear loser.

Myth 3: Plaintiffs' Lawyers Obtain a Significant Portion of their Clients

Through Advertising, Particularly Media Advertising and Direct Mail

The Supreme Court decision in Bates v. Arizona [FN47] freed lawyers from traditional strictures on advertising. Within the legal profession, personal injury specialists have probably been the most aggressive in using advertising. This has produced a bonanza in revenue for the telephone *750 companies that put out Yellow Pages, and in every major media market one sees significant television advertising by lawyers seeking personal injury clients. Most controversial has been direct mail solicitation where lawyers mine publically available reports of traffic accidents to identify potential clients and then send letters to these individuals telling them about the possibility of obtaining compensation and inviting them to contact the lawyer for a no-cost consultation. [FN48]

Given the amount of advertising done by lawyers, one might expect that advertising is the dominant vehicle through which most lawyers get personal injury clients. This is not in fact true. In my survey of Wisconsin contingency fee practitioners, [FN49] I ask them what percentage of their clients come from each of a variety of sources including:

• referrals from other lawyers;
• referrals from other clients;
• advertisements in Yellow Pages;
• advertising in other media;
• existing clients;
• community contacts and word-of-mouth;
• direct mail advertising;
• other; and
• unknown.

Table 1 summarizes the responses, showing the mean percentage obtained from each source and breaking this down between those lawyers who are personal injury specialists and those who are not. The only advertising source that produces a significant proportion of clients across the respondents advertisements in the Yellow Pages. The dominant sources of cases are the traditional ones of client referrals, referrals from other lawyers, *751 and referrals through community contacts. One surprising source, at least for the personal injury specialists, is "current clients." I interpret this as referring to repeat clients; as one personal injury lawyer described it to me, a surprising number of clients come back with new cases.

Note: Cell entries are the mean percentage reported for the source.
Source: Herbert M. Kritzer and Jayanth M. Krishnan, Lawyers Seeking Clients, Clients Seeking Lawyers: Sources of Contingency Fee Cases and Their Implications for Case Handling, 21 Law & Policy 347 (1999) at 351.

One might question whether this analysis obscures the possibility that a small group of lawyers, those who invest the most into media advertising and direct mail, are highly dependent on these sources. In fact, only 8 of the 471 respondents in my survey of Wisconsin practitioners reported that they were currently using direct mail, and only one of those reported getting more than 15% of his clients through his direct mail efforts. One of the lawyers I interviewed had been an aggressive user of direct mail, and he reported that despite all of his efforts he never got more than 20% of his clients through this medium; most of his clients were referrals from former clients or from other lawyers.

A significant minority (37%) of personal injury specialists do use non-Yellow Pages advertising. Among those who do use advertising in Yellow Pages, most obtained fewer than one-third of their clients through it (and almost none obtained one-half or more of their clients this way). Lawyers in one firm that was a heavy user of television advertising reported that when their advertisements were running, they could expect ten or more calls per day. Most of the calls concerned cases which had no significant fee potential or issues that they did not handle (or could not be handled on a contingency basis). The lawyers in this firm were happy if a week's worth of phone calls *752 yielded two or three cases. One lawyer in this firm estimated that advertising (both in media and in Yellow Pages) directly produced only about one-quarter of his revenue, although he attributed another one-quarter to indirect effects of advertising (i.e., referrals from former clients who themselves originally came in as a result of the advertising).

Are these findings peculiar to Wisconsin? Stephen Daniels and Joanne Martin have been engaged in a study of the personal injury plaintiffs' bar in Texas. Their study has involved both semistructured interviews and a mail survey. Based on ninety-five semistructured interviews, they found that only 10% of the respondents obtained more than one-half of their clients through "direct marketing," which included all forms of advertising (Yellow Pages, television, radio, newspaper, billboards, direct mail, etc.). In contrast, 27% obtained more than one-half of their clients through client referrals, and 51% obtained more than one-half of their clients through lawyer referrals. [FN50] Daniels and Martin's mail survey produced responses from 552 plaintiffs' lawyers practicing in Texas. [FN51] They split their respondents into four groups depending on the types of cases the lawyers handled: Bread and Butter 1 (handling the most routine cases); Bread and Butter 2; Heavy Hitters 1; and Heavy Hitters 2 (handling the largest, most complex cases). Table 2 shows the average percentage of clients in each category from each source listed in Daniels and Martin's questionnaire. Advertising in general accounts for about 12% of clients, and two-thirds of this 12% comes generally from Yellow Pages advertising. Advertising is least important for those at the top end of practice and most important for those toward the bottom; however, even for those in the group most dependent on advertising, only an average of about 21% of their clients are obtained in this way, and again, two-thirds of those come from Yellow Pages advertising. Thus, even for the group most dependent on advertising, no more than about 6% of clients come from a combination of television and direct mail.

*753

Note: Cell entries are the mean percentage reported for the source.
Source: Stephen Daniels and Joanne Martin, It Was the Best of Times, It Was the Worst of Times: The Precarious Nature of Plaintiffs' Practice in Texas, 80 Texas L. Rev. 1781 (2002). Some of the detail was provided to the author by Stephen Daniels (personal correspondence).

Despite all of the prominence of modern advertising, most lawyers representing clients on a contingency fee basis get the vast majority of those clients through the tried-and-true means of referrals, largely from satisfied clients and from other lawyers. What these analyses cannot measure is whether the advertising prompts people to seek out lawyers through one of these traditional means. For example, it is certainly possible that someone receiving a direct mail solicitation from a lawyer after an accident would be prompted to seek out a recommendation for a lawyer and then consult that lawyer, even if the solicitation did not draw the individual into the office of the lawyer who sent the solicitation. [FN52] Likewise, television advertising may have sensitized injury victims to the availability of compensation. However, it is hard to firmly link any changes in patterns of contacting a lawyer to these developments, first because it is not clear that there have been changes in those patterns, and second because there is no good baseline against which to compare earlier patterns to present patterns.

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Myth 4: Lawyers Accept as Clients Most of Those Individuals who Contact

Them with Potential Claims

One popular image of plaintiffs' lawyers is that they are so anxious to get clients that they will represent virtually anyone who calls on the telephone or walks in the door. In A Nation Under Lawyers, Mary Ann Glendon argues that, at least in the past, good lawyers did as much to discourage litigation as to advance it; she quotes an observation attributed to Elihu Root that "[a]bout half of the practice of the decent lawyer consists in telling would-be clients that they are damned fools and should stop." [FN53] The press furthers the image of contingency fee lawyers as stirring up litigation in reports of swarms of lawyers gathering whenever there is some major event that could produce litigation. [FN54] Even without such reports one should not be surprised that contingency fee lawyers have a reputation of stirring up trouble given the apparent logic of the contingency fee: the lawyers get a cut of whatever they recover, and without cases there is no cut to get.

Undoubtedly, there are lawyers who push the edge of the liability frontier or who engage in practices pejoratively referred to as ambulance chasing. However, the day-to-day reality of most contingency fee legal practices is very different from this image. While virtually every contingency fee practitioner wants to find highly lucrative cases, such cases are relatively rare. Many cases presented to lawyers are not winnable or do not offer a prospect of even a moderately acceptable fee. The contingency fee practitioner seeks to choose cases that offer a high probability of providing at least an acceptable return and hopes to find some fraction of cases that present the opportunity to generate a significant fee. [FN55] Lawyers evaluate potential cases in terms of the risks involved and the potential returns associated with those risks. An attorney will reject cases that do not satisfy the attorney's risk-to-return criteria. Thus, contingency fee lawyers resemble portfolio managers, choosing to "invest" (their time) in risky cases hoping to obtain adequate-or-better returns.

What does this mean in terms of actual practice when a potential client contacts a contingency fee lawyer? In my survey of Wisconsin practitioners, *755 I asked my respondents how many contacts they had received from potential clients in the prior year and how many of those contacts had led to a retainer agreement. [FN56] There are at least two ways to convert these figures into acceptance rates. First, we can look at it from the perspective of the lawyer by asking what is the typical proportion of potential cases lawyers accept? This involves looking at mean or median acceptance rates across the sample of lawyers. Alternatively, from the viewpoint of the potential client, one can ask what is the likelihood that a randomly selected client calling a randomly selected lawyer will have his orher case accepted by that lawyer? To look at this, the best estimate involves aggregating across lawyers: adding up the number of cases accepted across all of the lawyers and the number of contacts received across all of the lawyers and dividing the two figures. I present both types of estimates.

NOTE: Results based on weighted data; unweighted n is 455.

Overall, lawyers reported accepting cases from a mean of 49% (median 50%) of the potential clients who contacted them; the first and third quartiles are 25% and 75%, respectively. Aggregating across the 455 lawyers, [FN57] the lawyers accepted 23,614 (of 69,984) cases for an acceptance rate of 34%. Eliminating the seven respondents reporting 1,000 or more contacts gives an aggregate acceptance rate of 42%. As shown in Table 3, there appears to be a fairly clear linkage between volume and selectivity. For those lawyers or firms receiving about one-and-one-half or fewer contacts per week, the acceptance rate tends to be on the order of 50%; for those with 1.5 to about 20 contacts per week (1,000 cases per year), the acceptance rate is under *756 40%. For the very high-volume practices with more than twenty contacts per week, the acceptance rate drops off sharply to 8%.

I also asked lawyers why they declined cases, asking them to estimate the percentage of uses declined for the following reasons:

• questions about liability;
• low damages;
• a combination of questionable liability and low damages;
• outside of the lawyer's area of practice; and
• other.

Table 4 shows that the dominant reason for refusing cases involves questions of liability.

NOTE: Results based on weighted data.

Again, one might ask whether these patterns are peculiar to Wisconsin. They are not. In their survey of Texas plaintiffs' lawyers, Daniels and Martin asked the lawyers to estimate the percentage of calls from potential personal injury clients that lead to a signed contingency fee agreement. [FN58] Table 5 *757 shows the pattern both for all respondents and broken down into the same four categories of lawyers discussed previously. Overall, the typical respondent reports that about one-quarter of calls lead to representation. For lawyers handling the most routine cases, this figure rises to about one-third, and for those lawyers handling the biggest cases, the figure drops to under 20%. Based on these data, my findings for Wisconsin, if anything, overstate the acceptance rates. [FN59]

Note: Cell entries are the mean percentage reported for the source.
Source: Stephen Daniels and Joanne Martin, It Was the Best of Times, It Was the Worst of Times: The Precarious Nature of Plaintiffs' Practice in Texas, 80 Texas L. Rev. 1781 (2002).

Myth 5: Contingency Fees Are Standardized at a Rate of 33%

I frequently hear comments about the "standard, one-third contingency fee." [FN60] In my interviews with Wisconsin practitioners, many did in fact say that they normally charged one-third (unless statutes limited the percentage *758 in some way [FN61] ); however, others reported much less standardization in fees, and many of these lawyers who reported that they had a "normal" fee of one-third indicated that in some circumstances they would deviate from the standard fee.

My survey of Wisconsin practitioners makes it clear that there is substantial variation in the contingency fees that lawyers charge. [FN62] In my survey, I asked the lawyers to tell me about three specific cases: the most recent case settled without filing, the most recent case settled or disposed after filing but before trial, and the most recent case disposed by trial. For each of these cases, I asked the lawyers to describe the contingency fee arrangement they had with their client. Table 6 summarizes the responses.

TABLE 6: VARIATION IN CONTINGENCY FEES, WISCONSIN

*759 Excluding those types of cases for which fees are specifically governed by statutes or regulations, 64% of the cases in my sample involved retainers specifying a fee as a flat percentage of the recovery; 31% employed a variable percentage; and 5% employed some other type of contingency arrangement. Of the cases with a fixed percentage, a contingency fee of one- third was by far the most common, accounting for 88% of those cases. Five percent of the cases called for fees of 25% or less, 1% specified fees around 30%, less than 1% specified fees exceeding one-third of the recovery; the exact percentage was not ascertained for 4% of the cases. Thus, on the order of 60% of the cases employed the standard one-third contingency fee.

The most common pattern for those cases employing a variable percentage called for a contingency fee of one-quarter if the case did not involve substantial trial preparation (or, in some cases, did not get to trial) and one-third if the case got beyond that point. The contingency fee rose to 40% or more if the case resulted in an appeal. For cases not involving a lawsuit, the contingency fee percentage could be as low as 15% or as high as 33%. The range for those cases involving a suit but not trial was 20% to 43%. For those going to trial, the range was from 25% to as high as 50%. One of the lawyers told me that he would consider taking certain types of risky cases which he saw as having a high likelihood of going to trial only if the contingency fee percentage was 50% if the case went to trial. Another lawyer explained that he would consider quoting a fee that might involve a percentage as high as 50% in cases where the potential client came in with an offer in hand. In these cases, the fee would be based only on any recovery over and above the offer in hand, with the fee being the lesser of 50% of the additional recovery or 33% of the total recovery.

Thirty-four cases in the sample involved a fee with a contingency element that did not conform to the standard percentage fee arrangement. The variations included:

• An hourly fee paid until an initial settlement offer is obtained, and then 50% of anything over and above that offer.
• An hourly fee capped at 33% of the recovery.
• A flat retainer plus a percentage.
• An hourly retainer plus a percentage once that time is exhausted.
• An hourly fee up to a set maximum with a percentage if that maximum is exceeded.
• A premium hourly rate with no fee if there is no recovery.
• A reduced hourly rate plus a bonus based on recovery.
  *760
  
• A reduced hourly rate plus a reduced percentage.
• A capped hourly rate plus a percentage.

In my interviews, it was clear that some lawyers were very open to negotiating individualized retainer agreements, while others were very firm in offering only specific types of arrangements. Some lawyers expressed a willingness to negotiate with the client to get a case that they viewed as good; others rejected any idea of such negotiations. Others told me that they specifically laid out the choice of an hourly fee versus a contingency fee. [FN63] Another lawyer, whose practice was exclusively contingency fee, told me that in a case of clear liability, severe injury, and a relatively low policy limit, he would charge 5% or less (e.g., $5,000 on a $100,000 recovery) if he was able to get the insurer quickly to tender its policy limits.

Again, one can ask whether the variation in fees is peculiarto Wisconsin. Some evidence from the RAND CJRA survey of federal cases shows that this is not the case, although that study does not provide the same level of detail found in the Wisconsin survey. [FN64] Specifically, the question asked by the RAND CJRA survey did not allow respondents to describe a fee that varied depending on the stage of disposition or that involved alternative types of contingency arrangements. Of the cases handled under a contingent fee in the RAND survey, 55% involved a one-third contingency fee, 25% involved a contingency fee of less than one-third of the recovery, and 20% involved a contingency fee of more than one-third of the recovery. This pattern is both similar and different from the Wisconsin pattern. It is similar in the percentage of cases that involved a one-third fee; it is different in that the RAND survey showed a substantially larger proportion of cases involved a contingency fee of more than one-third of the recovery. Despite these differences, it is clear that while the average contingency fee may be on the order of one-third, there is significant variation from this supposed "standard." [FN65]

My research in Wisconsin revealed a number of other important *761 variations worth noting. First, while the fee is usually described as being based on the gross recovery (i.e., before the lawyer is reimbursed for expenses), some lawyers in Wisconsin treat the gross recovery for fee- computation purposes as the recovery less any payments to subrogated interests. Even when they do not do this, lawyers typically seek to get the subrogated parties to take a reduced payment, which serves as a way of netting more for the client (or as a way of having the subrogated party pay a share of the attorney's fee).

Second, it is not at all uncommon for lawyers to reduce the percentage that they are entitled to under the retainer agreement. In the survey, I asked lawyers if the final fee differed from the fee specified in the retainer. In 18% of the cases for which the respondents obtained some recovery for their clients, the final fee was less than what they could have taken under the terms of the contingency fee agreement. The survey did not include questions as to why these reductions occurred. Follow-up interviews suggested that two primary elements drove the decision to take a lower fee. First, there was a perception on the part of the lawyer that taking a smaller fee would facilitate a settlement. For example, a lawyer might feel that the client would be more likely to go along if the legal fee was cut from 33% to 30% or 25% or even 20%. A large proportion of the reductions were from one "round" figure (e.g., 33% or 25%) to another (e.g., 30% or 25% or 20%). Second, some lawyers expressed the view that the lawyer should not walk away with more than the client. In cases in which substantial payments had to be made to subrogated parties, lawyers often reduced their fee to a level that they split what was left after paying the subrogated claims with the client. Occasionally, when the case yields a minimal payoff, the lawyer will simply waive any fees owed. Sometimes a lawyer will waive a fee on a small case as a means of generating good will, particularly if the client is in a good position to refer future potential clients to the lawyer.

Myth 6: Lawyers Routinely Receive Windfall Fees from Contingency Fee Work

There is no doubt that on occasion lawyers handling cases on a contingency fee basis obtain very large fees, whether you measure those fees in absolute terms or against the time the lawyer devoted to the case. What is important in considering changes to the types of fees that are allowed is the nature of typical contingency fees. Changes that fail to recognize the day-to-day reality of contingency fees are likely to impact the system in ways that deny redress to those harmed by the actions of others.

In thinking about returns from contingency fees, the first issue to deal *762 with is measurement. I consider that issue before turning to estimates of returns.

Measurement

The first measure that I employed was the "effective hourly rate" (EHR): the fee received by the lawyer divided by the amount of time the lawyer had to expend to obtain that fee. This measure captures the various elements of the contingencies facing the lawyer:

This measure is useful because it is precisely this figure that some critics of contingency fees have attacked, suggesting that lawyers are frequently able to obtain "effective hourly rates of thousands and even tens of thousands of dollars." [FN66] While there are some cases that do earn lawyers fees that translate into rates of $1,000 or more per hour, we know little or nothing about the frequency of such cases or, more importantly, what the typical effective hourly rate looks like. Economists would argue that the economically rational lawyer would demand to do better, on average, from contingency fees than from hourly (or flat) fees because the contingency fee lawyer is providing additional services to the client which merit compensation. [FN67] However, this type of economic rationality presumes an opportunity cost analysis in which the contingency fee lawyer has alternative uses for his or her time which will provide a known level of compensation; in situations where a lawyer has otherwise unused time, the lawyer may be willing to accept cases where the lawyer expects the compensation to be less than what the lawyer would like to believe is the value of the time involved. [FN68]

One problem with the effective hourly rate measure is that it measures returns at the level of the individual investment, not at the level of what might be called the lawyer's overall portfolio. Short of a complete audit of a lawyer's cases over a period of time, there is no ready way to measure the overall performance, or "yield," on a portfolio. One might be tempted to view the mean effective hourly rate or the median effective hourly rate as a measure of portfolio performance, but that is flawed. Using such a measure *763 would presume that all cases should be treated equally. It is a bit like the situation where a stock investor with $25,000 to invest puts $1,000 into a penny stock and the remaining $24,000 into three stocks costing $8,000 each. If the investor sells all of the stock a year later, receiving $5,000 for the penny stock and $9,000 for each of the mainstream stocks, the total received on the $24,000 is $32,000 for a yield of $8,000 or (33.33%) of the original $24,000. However, the individual returns are 400% on the penny stock and 12.5% on each of the mainstream stocks. If one were to average these returns, the average would be 109.375%. Which measure makes more sense as an overall indicator of yield on the portfolio?

While I do not have the data needed to look at the portfolio return for individual lawyers, I can obtain estimates of the yield from what I will label the "meta-portfolio." By this I mean