A Few Words on Contingent Fees

Black’s Law Dictionary defines a contingent fee as “[a] fee charged for a lawyer’s services only if the lawsuit is successful or is favorably settled out of court … Contingent fees are usually calculated as a percentage of the client’s net recovery ….”  They are commonly used in civil litigation to provide access to the judicial system for individuals or entities lacking the means to pay attorneys’ fees as they are incurred.  Without them, many important cases that have resulted in substantial recoveries would never have been filed.

Recently, however, contingent fees have come under serious scrutiny in the context of state or municipal governments hiring outside counsel to prosecute actions on behalf of the government in return for a contingent fee.  Of course, this is really nothing new.  State attorneys general, other units of state government and municipalities have long entered into contingent fee agreements with private law firms to assist them in litigating large and complicated cases.  Some say the trend began in the 1980’s when Massachusetts hired private counsel to litigate asbestos removal claims.  A more recent example is tobacco litigation.

Atlantic Richfield Co. v. County of Santa Clara

The controversy was reignited in part by the United States Supreme Court’s recent refusal to hear the appeal of a California Supreme Court decision holding that the government can hire private attorneys on a contingent basis under certain circumstances.  In that case, a group of California municipalities retained outside counsel to help them prosecute public nuisance actions against the manufacturers of lead paint.  The law firms were paid on a contingent fee basis.  Although the California Supreme Court noted that its decision in People ex rel. Clancy v. Superior Court, 705 P.2d 347 (Cal. 1985) supported a bright-line rule barring such arrangements, the court decided to limit its holding in Clancy by allowing governments to enlist the help of private attorneys through contingency fee agreements so long as government attorneys retained the ultimate power to supervise and control the litigation.  Atlantic Richfield, one of the paint manufacturers, appealed the decision to the United States Supreme Court, where its petition for certiorari was supported by a number of amicus briefs, including one by the Chamber of Commerce.  The Supreme Court declined to hear the case in January.

Opponents of the Atlantic Richfield decision (which, of course, include the defendants who committed the wrong acts in the first place) clearly prefer not to have the private plaintiffs’ bar representing their government adversaries.  They make a number of arguments in support of their position, arguments which, when studied with a critical eye, amount to nothing more than myths.

Myth 1: Contingent Fees Encourage the Filing of Frivolous Lawsuits

Opponents of contingent fee arrangements advance the notion that a government’s ability to hire private counsel will promote the filing of baseless litigation.   Contingent fee agreements, however, do nothing more than properly align the interests of the lawyer, the government and the taxpayer.  They help the government realize its duty to recover taxpayer dollars that have been lost due to a defendant’s misconduct.

Unfortunately, anti-contingent fee rhetoric does not always respect this reality.  Consider the following passage:

One of the most serious dangers is that contingent fees tend to erode an attorney’s judgment … When the lawyer in effect invests in a cause of action by taking his fee as a percentage of the recovery, it is easy for him to lose his detachment from the client’s interests.  He often becomes more of a businessman concerned with his own financial well-being than a proper advisor to the client … The contingent fee is now viewed as giving a lawyer an interest in the actual accident, disaster, or transaction that precipitated the lawsuit and a stake in its outcome.  This … undermines public faith in the judicial system by seeming to encourage the filing of lawsuits that lack merit.

David M. Axelrad and Lisa Perrochet, Public Nuisance: Public Entity Litigation and Contingency Fee Counsel (quoting William G. Ross, The Honest Hour 242 (Carolina Academic Press 1996)) (emphasis added).

This paragraph misses the point.  It is not in the interest of a government litigant seeking to recover for wrongs done to it to be represented by a “detached” attorney, as opposed to one who is as interested in a favorable outcome as the government is.  Virtually nothing is ever accomplished without an incentive, and the passage above fails to recognize that a lawyer who is not motivated to achieve a favorable outcome could well be motivated instead to simply bill for the maximum number of hours possible, or toil for a paycheck, regardless of the outcome.

Most incredible of all is the last sentence, which makes the oft-repeated assertion that contingent fees encourage the filing of frivolous lawsuits.  In all the places and ways in which I’ve seen this statement repeated, I have never seen it supported with convincing data of any kind.  In fact, it makes no sense whatsoever.  Why on earth would a lawyer front costs and spend countless hours on a meritless case?  In reality, lawyers that handle complex contingent fee litigation undertake significant due diligence before taking a case (something the contingent fee arrangement encourages) and many more cases are rejected than taken.  Of course, even the best due diligence does not always mean that the case results in a victory — but that does not automatically mean the case was not worth bringing in the first place.  In fact, the contingency fee arrangement actually puts the interests of the lawyer and the client so clearly in line with each other that one would expect the lawyer to tell the client immediately if the case was not worth pursuing.  This is why, when viewed critically, the myth of the meritless case is so unconvincing.

Myth 2: Contingent Fees Paid to Lawyers Are a Waste of Taxpayers’ Money

When government entities and private lawyers working together under contingency fee agreements are ultimately successful, the massive recovery for taxpayers is often overlooked in favor of headlines focusing instead on the fees paid to the lawyers.  The popular view appears to be in line with this author’s comments:

Contingency fee awards are often misrepresented as coming at no cost to the public, with no need for government resources.  But these contracts are not free.  A fee paid to private lawyers as a result of the litigation is money that would otherwise fund government services or offset the public’s tax burden.

Schwartz, Underhill, Silverman and Appel, Governments’ Hiring of Contingent Fee Attorneys Contrary to Public Interest, Washington Legal Foundation Legal Backgrounder, Vol. 23 No. 34, Aug. 8, 2008 (emphasis added).  These are careless misstatements.  The contingent fee paid to a lawyer under such circumstances is not money the government would otherwise have been able to use for other purposes; it is money the government would never have seen; money that would have remained in the pockets of those who committed wrongs against the government and the people it has a duty to represent.

Myth 3: Contingent Fee Arrangements Invite Corruption

Another popular criticism of contingent fee agreements, at least in the government context, is that they create opportunities for corruption and political patronage.  It is of course impossible to live in the City of Chicago or the State of Illinois without at least appreciating this concern.  What the critics have touched upon here, however, is a false argument – a completely separate problem that should not be raised to undermine the utility of contingent fees.  It is like arguing that one should stop delivering food to homeless shelters because there are so many bad drivers on the road.  State laws, including laws requiring the government to seek competitive bids from law firms, can provide the transparency needed to alleviate such concerns.

Unfounded rhetoric opposing partnerships between government entities and private attorneys does a disservice to governments, taxpayers and the legal profession.  The authors of such rhetoric seek to erect public policy obstacles preventing government officials from recovering taxpayer dollars and fulfilling their duties to the public.  The next time you hear or read such commentary, stop to think who is behind it and what their true motivations likely are.