Contingency Fees

Point of Law has an interesting blog post on a new study regarding contingency fees. I found two conclusions of interest.

First, the study found that people who had the financial means to pay attorneys’ fees up front still preferred a contingency fee arrangement, even if that arrangement meant they were ultimately likely to pay more in fees. Apparently, affluent trial lawyers were also included in the experiment as imaginary plaintiffs, and they too chose the contingency fee agreement over the hourly billing rate. The authors explain that our instinct to be “loss adverse” is the main reason people prefer a contingency fee arrangement even if they expect it will result in higher legal fees. This theory may also explain why people are far more unhappy when they lose $100 than happy when they find $100.

I suspect another reason for this preference that the authors do not point to is that it is less stressful to have some level of cost certainty. I know I do not like paying anyone by the hour, especially when I have no idea how many hours will need to be expended. I would rather just be given an all inclusive price to solve the problem.

Another reason clients may prefer a contingency fee arrangement is that it makes sense. In any business relationship, if you are able to forge a deal where the parties are working with vested interests, you are better off. The personal injury lawyer-client relationship is one of the cases where the parties’ interests line up the best, and the defense lawyer-client relationship is one where the parties’ interests line up the worst. I began my career at a defense firm and clearly remember when one group in our law firm defeated a nationwide class action, saving the client millions of dollars. Everyone looked like they had just lost their best friend. Why? Because victory meant the work would dry up. Is there a different way for defense lawyers to be compensated that would make more sense? If there is, I can’t figure it out. It is just one of those business relationships where the interests of the involved parties are very hard to align.

The study also draws some interesting conclusions about the phenomena that most contingency fee personal injury lawyers charge the same fee. Some have theorized that relatively uniform pricing may be inefficient and there is textbook economic support for that theory. However, the authors conclude that a standard rate endures among personal injury lawyers because of a process called “assortive matching.” In other words, injury victims with the best cases contract with the lawyers with the best reputations, second-best cases are handled by the attorneys with the second-best reputation, and so forth.

This theory largely holds true with very sophisticated clients and because of referrals from other lawyers. As our practice and reputation have grown, the average size of our cases has increased exponentially. But all too often this theory does not hold true. Unsophisticated clients believe that the biggest and best firm in town is the one that has the most television advertisements. Or they believe the guy that got them off on a DWI or wrote a will for them a few years ago, who has never tried a personal injury case, is the best personal injury lawyer to turn to when their wife is killed in a truck accident. In fact, some of the biggest cases we in our office have come from criminal lawyers whose clients return to them when they or someone they love is injured or killed.

So while I think the assertive matching theory holds true to some extent for personal injury lawyers, it often fails. This is not a bad outcome if the lawyer getting the cases does the right thing both for the lawyer and the client and refers the case to a lawyer who has experiencing handling catastrophic cases. But it can be a disaster when the wrong lawyer has the wrong case.

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