Plaintiffs Firms

Contingency Fees: The Free-Market Deterrent To Frivolous Lawsuits

No one likes frivolous lawsuits -- especially plaintiffs' lawyers.

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No one likes frivolous lawsuits. Corporate defendants. The judiciary. Plaintiffs’ lawyers. That’s right. Plaintiffs’ lawyers loathe frivolous lawsuits.

Advocates of tort reform have peddled the comic book narrative that good plaintiffs’ lawyers possess a mutant-like power that allows them to turn a bunch of bad cases into a highly profitable law practice. According to the narrative, these televangelists with law degrees waltz into courts with their bad cases, hypnotize juries with their power, and walk away with exorbitant legal fees.

The plaintiffs’ lawyer mutants are to be feared. Traditional free market principles cannot possibly contain their power. If left unchecked, they will lead to the utter annihilation of corporate America. The only hope to save these corporate damsels in distress is government. State government. Federal government. Any kind of government. Just this once, in the face of an unprecedented mutant threat, corporate America wants – no, needs – government regulation (i.e., “tort reform”).

This narrative should be insulting to all of us who practice law. It’s insulting to jurors who decide tough cases. It’s insulting to judges who facilitate a fair process. It’s insulting to plaintiffs’ lawyers. And it should be most insulting to defense attorneys who, by insinuation, are so inept that they lose meritless cases at such a steady clip that widespread government intervention is necessary.

The narrative completely ignores the economic realities of a plaintiffs’ lawyer’s practice. There is absolutely no financial incentive for a plaintiffs’ lawyer to knowingly take a bad case. Why? Because legions of able-bodied defense attorneys are waiting to pummel plaintiffs’ lawyers that file bad cases. And when plaintiffs’ lawyers get pummeled, they don’t make any money. In fact, they lose money. Sometimes lots of money.

The plaintiffs’ lawyer’s practice is built upon the contingency-fee model. The lawyer’s fee is contingent upon recovering compensation for the plaintiff. The lawyer advances all of the costs associated with the case. If the lawyer is successful in recovering funds for the plaintiff, her fee is a percentage of the amount recovered. If unsuccessful, the lawyer receives nothing. Not even the costs expended. Regardless of how many hours and/or dollars she invested in the case.

Consider for a moment the myriad of potential costs incurred by a plaintiffs’ lawyer in a serious injury case:

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  • $   1,000 – Court filing fee for Petition For Damages.
  • $   1,000 – Medical record costs.
  • $   1,500 – Jury bond.
  • $   2,000 – Misc. court filing fees.
  • $   2,500 – Treating physicians’ deposition costs.
  • $   5,000 – Travel costs for out of town depositions.
  • $   5,000 – Economic expert fees.
  • $ 15,000 – Court Reporter/Videographer deposition costs.
  • $ 25,000 – Liability expert fees.
  • $ 50,000 – Damage expert fees – Voc Rehab, Life Care Planner, Etc.

From an economic perspective, why would a plaintiffs’ lawyer knowingly risk investing countless hours and thousands of dollars in a bad case? It makes absolutely no sense. For a senior plaintiffs’ lawyer who spent decades building up a practice, a couple of substantial investments in bad cases could wash away a lifetime of success. For the young plaintiffs’ lawyer, an investment in bad cases could lead to a shuttered practice and financial ruin.

Because the contingency-fee model often results in periods of great feast and famine for a plaintiffs’ law firm, individual lawyer compensation schemes typically reflect this reality. Some firms base lawyer compensation solely on productivity. Rather than receiving a set salary, lawyers are paid a percentage of the fees earned on cases they bring in and/or perform substantial work. Other plaintiffs’ firms use a blended compensation model whereby lawyers receive a modest salary as well as a percentage of the fees earned on certain cases. Other more established plaintiffs’ firms use a more traditional compensation structure whereby competitive salaries are paid with discretionary bonuses. Regardless of which lawyer compensation scheme is used by the plaintiffs’ firm, none of them incentivize taking bad cases that require heavy investments in time and money without a likely return.

Do bad cases get filed? Sure. Those cases come not from some devious motivation to “work the system” and extort corporate America, but most often from inadequate evaluation by the plaintiffs’ lawyer. A plaintiffs’ lawyer’s ability to investigate a potential case is unfortunately limited. Prior to suit being filed, plaintiffs’ lawyers cannot avail themselves of discovery procedures that compel parties to produce critical documents and make witnesses available to be deposed. Over the years, many states have reduced statutes of limitation in the name of “tort reform.” This reality allows less time for evaluation and potential resolution before suit must be filed. As a result, plaintiffs’ lawyers are often left to make judgment calls based upon the information at their disposal in a compressed period of time. Sometimes they make the right call. Sometimes they make the wrong call.

But when a plaintiffs’ lawyer makes the wrong call and files a bad case, the free market punishes her dearly by way of the contingency fee model. The plaintiffs’ lawyer loses both substantial time and money when a bad case is filed. Thus, the free market, by way of the contingency fee model, reinforces the value of proper case evaluation.

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The lessons learned by Apple in its free-market failures of the 1980s and 1990s led to tweaks and changes that resulted in the iPhone and iPad. Similarly, the sting of free-market failures caused by the contingency fee model lead to changes in the way that the plaintiffs’ lawyer evaluates and litigates cases. Those plaintiffs’ lawyers who heed the hard lessons of the contingency fee model adapt, improve, and prosper. Those who don’t find themselves relegated to the free-market wilderness with the likes of Polaroid, Compaq, and Alta Vista.

Jed Cain is a trial lawyer and partner with Herman, Herman, & Katz, LLC in New Orleans, Louisiana. Jed writes about family, the law, and Louisiana current events at Cain’s River. He can be reached by email at jcain@hhklawfirm.com.

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