AMERICAN CONTINGENCY FEES

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1 AMERICAN CONTINGENCY FEES HERBERT M. KRITZER William Mitchell College of Law SPECIAL THANKS TO: National Science Foundation University of Wisconsin Graduate School The RAND Corporation Stephen Daniels, American Bar Foundation

2 Are contingency fees a uniquely American phenomenon?

3 What do I mean by contingency fee? No win, no pay Percentage vs. other calculation Fully vs. partially contingent Defendant contingency fees

4 Use of Contingency Fees United States England ( conditional fees ) Scotland ( speculative basis ) Canada; some provinces allow percentage fees Ireland ( no goal, no fee ) New Zealand ( speculative basis ) France Australia (at least in some class actions) Greece (percentage fees) Dominican Republic (percentage fees) Brazil Israel Germany (?)

5 While in most contingency fee cases there is a recovery, that does not mean that lawyers face little or no risk in handling cases on a contingency fee basis.

6 Elements of Risk in Contingency Fees Nonrecovery ( no-win, no-pay ) Size of recovery (and hence size of fee) Investment (time and disbursements) required for recovery Time until recovery

7 Contingency fee lawyers are key gatekeepers. They turn away more cases than the accept..

8 Case Screening, Wisconsin Acceptance Rates 60% 50% 40% 30% 20% 10% 0% All Case Volume (per year) 1000 over 1000 mean percent accepted percent of total cases accepted

9 Case Screening, Wisconsin Why Cases Are Declined 50% 40% 30% 20% 10% 0% All Cases All Cases without High Volume Low Volume Medium Volume Lack of Liability Both Liability and Damages Other Reasons Inadequate Damages Outside Lawyer's Expertise

10 Case Screening, Texas Percent Signed Up 60% 50% 40% 30% 20% 10% 0% 2000 (mean) 2000 (median) 1995 (mean) 1995 (median) All Heavy Hitters Bread and Butter SOURCE: Stephen Daniels and Joanne Martin, "It Was the Best of Times, It Was the Worst of Times: The Precarious Nature of Plaintiff's Practice in Texas," 80 Texas Law Review 1781, 1789 (2002).

11 While the most common contingency fee is one third, lawyers vary significantly in the fees they charge on a contingency basis.

12 Fee Percentages Wisconsin other 5% flat 25 percent 3% variable percent 31% flat 33 percent 57% other or unknown flat 5%

13 Fee Percentages: Federal CJRA Study more than 33 percent 20% less than 33 percent 25% 33 percent 55%

14 Fee Percentages: RAND Injury Study (1991) more than 33 percent 11% less than 33 percent 36% 33 percent 53%

15 Fee Percentages: Insurance Research Council Consumer Study (1999) 36 percent or higher 7% 20 percent or less 19% percent 20% percent 54%

16 Most contingency fee cases general at best modest profits for the lawyer. Most lawyers profit most from a small proportion of their contingency fee

17 Measuring Return on Contingency Fee Work Effective Hourly Rate EHR = fee received hours Mean Hourly Return MHR fees = hours

18 Baselines for Comparison Auto mechanic: $75-$100 per hour Twin Cities Plumber: $150 per hour Routine doctor s exam: $300-$500 per hour Neurosurgery: $3,000-$5,000 per hour Median hourly rate for lawyers charging by the hour Wisconsin: $125 per hour National: $125-$133 per hour

19 Returns from Contingency Fee Work, Wisconsin Data $300 $250 $200 $150 $100 $50 $0 Mean EHR Mean Hourly Return 10% Trimmed Mean Hourly Return 1 Median EHR 10% Trimmed Mean EHR

20 Returns from Contingency Fee Work and Selected Case Characteristics I DISPOSITION STAKES $500 $500 $400 $400 $300 $300 $200 $200 $100 $100 $0 Unfiled Filed, not tried Tried $0 <$20,000 $10,000 - $50,000 >$50,000

21 Returns from Contingency Fee Work and Selected Case Characteristics II Area of Law $450 $400 $350 $300 $250 $200 $150 $100 $50 $0 Auto Accident * Medical Malpractice Other Personal Injury Workers Comp/Soc Sec Contracts Other *NOTE: Median EHR for Medical Malpractice is -$12

22 Returns from Contingency Fee Work and Selected Lawyer Characteristics I Years of Experience $500 $400 * $300 $200 $100 $0 Five or less Six to ten Eleven to twenty More than twenty * $672

23 Returns from Contingency Fee Work and Selected Lawyer Characteristics II $500 $400 $300 $200 $100 Practice Area $0 Personal injury plaintiffs Other litigation General practice Other type of practice

24 Returns from Contingency Fee Work and Selected Lawyer Characteristics III Case Volume $500 $400 $300 $200 $100 $ more than 100 Cases per Year

25 Returns from Contingency Fee Work: National Comparisons $800 $700 $600 $500 $400 $300 $200 $100 $0 Federal Cases 1991 Federal Cases All Wisconsin Cases "High Stakes" Wisconsin Cases All Wisconsin Court-Filed Cases "High Stakes" Wisconsin Court-Filed Cases

26 Lawyers may have short term interests in resolving contingency fee cases because with modest cases the fee potential is limited.

27 Economics of the Contingency Fee $125/hour $20,000 case, 1/3 contingency fee effective hourly rate = fee/hours hours recovery fee rate stage 4 $3,000 $1,000 $ $6,000 $2,000 $125 prefiling 40 $12,000 $4,000 $100 pretrial 120 $18,000 $6,000 $50 trial 200 $18,000 $6,000 $30 appeal

28 Clients should not necessarily prefer the hourly fee as an alternative.

29 Is an Hourly Fee Better? $125/hour hours contingency fee hourly fee net recovery hourly fee net recovery contingency fee 4 $1,000 $500 $2,500 $2, $2,000 $2,000 $4,000 $4, $4,000 $5,000 $7,000 $8, $6,000 $15,000 $3,000 $12, $6,000 $25,000 -$7,000 $12,000

30 The long-term interests of contingency fee lawyers is best served by pursuing what is in the best interests of their client rather than by pursuing the lawyer s short-term interest.

31 LONG TERM AND SHORT TERM INTERESTS The importance of good results for the lawyer s reputation. The role of reputation in obtaining clients. Lawyers are like investors, they need to approach their set of cases as a portfolio rather than being too concerned about individual cases.

32 MORE INFORMATION? Visit my home page at: Full results of the study: Risks, Reputations, and Rewards: Contingency Fee Legal Practice (Stanford University Press, 2004)