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Washington Examiner
September 20, 2005

New rule would curb excessive legal fees

Say you're injured by a drunken driver, so you talk to a lawyer about suing. He takes your case on a contingency-fee arrangement: If you lose, you pay no legal fee. If you win, the lawyer takes one-third or more of the award — plus expenses. Contingency fees are standard practice in most tort cases, and the argument for them has a core of plausibility. When an injured person can't afford to hire a lawyer, a contingency-fee arrangement gives that person "a key to the courthouse" and a fighting chance at justice.

In recent decades, however, unscrupulous trial lawyers have turned that rationale into a burlesque of justice. The Examiner's "Balancing the Scales" editorial series recently reported an example: A class action lawsuit accused Federated Department Stores of overcharging customers for cosmetics. Admitting no fault, Federated settled before trial. Plaintiffs each got certificates for free cosmetics worth $18 to $25. The lawyers collected $24 million in contingency fees.

That kind of windfall is all too typical, and it's what Supreme Court Justice Sandra Day O'Connor was talking about in a 2001 speech: "Such arrangements have made more overnight millionaires than almost any other businesses, and the perverse incentives and the untoward consequences they are creating within our profession are many."

A measure of those incentives is provided by Prof. Lester Brickman of the Cardozo School of Law. He found that since 1960, "the effective hourly rates of tort lawyers have increased 1,000 percent to 1,400 percent" (in inflation-adjusted dollars). Even those percentages don't convey the magnitude of the problem. Professor Brickman found that effective hourly rates sometimes ran $25,000 to $50,000 an hour; in tobacco litigation, plaintiff lawyers have collected as much as $200,000 an hour.

Trial lawyers say they deserve to be paid for taking the risk of pursuing cases they might lose. But that risk hasn't tracked with soaring contingency fees. Professor Brickman found that "plaintiff win rates in personal injury cases have remained essentially consistent in the past 40 years." In product liability and medical malpractice cases, plaintiff success rates increased substantially during that period.

There's usually no justification for the huge differences in contingency fees that plaintiff lawyers collect from case to case. As one federal judge wrote, "Obviously, it is not 10 times as difficult to prepare, and try or settle a $10 million case as it is to try a $1 million case."

Correcting this wholesale exploitation of civil law requires technical legal reforms too numerous to go into here. But a more fundamental problem is an erosion of legal ethics. The American Bar Association and state bars all have rules requiring lawyers to set "reasonable" fees. Reasonableness is defined by such variables as the time and effort a case requires, the risk of losing and the amount in question.

In practice, however, plaintiff lawyers ignore these rules with almost universal impunity. Bar associations and most judges couldn't seem to care less.

The past few years have brought increasing interest in a sensible proposal called the "New American Rule." Under this rule, plaintiff lawyers would have to offer clients two alternatives: a specific contingency fee and an hourly rate.

Here's the intriguing part: Clients would choose between these alternatives after representation concluded, and presumably they would choose the less costly option. If lawyers think $20,000 an hour is reasonable, let them tell the unwary client up front.

Plaintiff lawyers see this as a move to abolish contingency fees. But it isn't. It's a move to curb colossal greed. Contingency fees have a place in our legal system; they do, after all, give poor people a "key to the courthouse." The New American Rule would preserve that key. But it would also reduce the perverse incentive of unregulated contingency fees, an incentive that has tempted far too many lawyers to become professional rip-off artists.

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