contingency-fee
Why do some people argue that contingency fees increase lawsuits?
<p>I've seen this argument from a number of people, such as <a href="https://www.nytimes.com/roomfordebate/2010/11/15/investing-in-someone-elses-lawsuit/more-money-into-bad-suits" rel="nofollow noreferrer">this New York Times article</a>.</p>
<blockquote>
<p>Most countries do not allow contingent fees ... Allowing contingent fees increases the number of suits.</p>
</blockquote>
<p>I have trouble following the logic. Shouldn't the use of contingent fees reduce the incentive to start lawsuits that one is likely not going to win? Shouldn't that reduce pointless lawsuits?</p>

<p>Contingency fees are arguably designed to increase lawsuits; or more accurately, they are designed to increase access to legal representation for those without resources, or whose resources are disproportionate to their legal opponent, which can increase the number of lawsuits. Some of these lawsuits may be &quot;good/valid&quot; lawsuits, and some may be &quot;bad/nuisance&quot; lawsuits.</p>
<p>The idea of a contingency fee is that rather than an hourly rate, the lawyer is entitled to a percentage of any award or settlement the defendant receives. Generally, such a percentage converts to a much higher amount than what a lawyer would receive on a per-hour basis. It also aligns a plaintiff and attorney's finical interests together, in terms risk and reward (e.g. accept a settlement for quick and sure cash now, or continue on to trial for a potentially larger award, but risk losing). There is a disincentive for lawyers to take on meritless cases, because they often receive little to no compensation in the event of a loss.</p>
<p><em>However</em>, the contingency fee system <strong>can</strong> increase the number of lawsuits, including nuisance suits, by incentivizing lawyers to take on &quot;long-shot&quot; cases or just trying to grab quick settlement offers, which can potentially be in the best interest of a legitimate plaintiff, but equally could be abused by lawyers searching for quick settlements, rather than victorious judgements.</p>
<p>Lawyers are incentivized to take &quot;weak&quot; cases, regardless of validity, if their portion of the awards are sufficiently large. For example, imagine a hourly-fee case A, and a contingency-fee cases B and C. Case A can be estimated to accrue $200,000 in lawyer fees, regardless of outcome, but cases B and C each have a 30% contingency, and a 20% chance of victory/settlement. Case B is estimated to yield a settlement/judgement of $5,000,000, and Case C is estimated to yield a settlement/judgement of $50,000,000. Case B's &quot;expected return&quot; to the lawyer is $300,000 (5 million * 0.20 * 0.30), a 50% increase, while Case C's &quot;expected return&quot; is 3,000,000, an order of magnitude larger than the hourly-fee case. (Numbers are just for illustration purposes.)</p>
<p>For an example of such &quot;fishing for settlements&quot;, see the Prenda Law case (with the caveat that those abuses would not be affected by the presence or absence of contingency fees, since the Prenda Law &quot;plaintiffs&quot; were the lawyers themselves).</p>
<p><a href="https://www.popehat.com/tag/prenda-law/" rel="noreferrer">https://www.popehat.com/tag/prenda-law/</a></p>
<p><a href="https://en.wikipedia.org/wiki/Prenda_Law" rel="noreferrer">https://en.wikipedia.org/wiki/Prenda_Law</a></p>
<p><a href="https://arstechnica.com/tech-policy/2019/07/prenda-law-porn-troll-saga-ends-with-prison-for-founder/" rel="noreferrer">https://arstechnica.com/tech-policy/2019/07/prenda-law-porn-troll-saga-ends-with-prison-for-founder/</a></p>

<blockquote>
<p>Shouldn't the use of contingent fees reduce the incentive to start lawsuits that one is likely not going to win? Shouldn't that reduce pointless lawsuits?</p>
</blockquote>
<p>Pointless lawsuits are started basically in these two situations:</p>
<ul>
<li>stubborn clients instructing their lawyers to sue even though they are advised against it;</li>
<li>unscrupulous lawyers suing just to charge fees and lying to their clients that it is not pointless.</li>
</ul>
<p>None of the above scenarios involve contingent fees: in the first one the lawyers will always want to charge fees as they know the case is pointless; in the second one charging fees is the main objective, so it can't be contingent either.</p>
<p>Therefore, the absolute number of pointless lawsuits has virtually no connection to contingent fees.</p>
<p>However, contingent fees increase the number of <strong>potentially fruitful</strong> lawsuits: potential plaintiffs who would otherwise not sue due to limited budgets, now can  sue without paying anything. So they do, which increases the total number of lawsuits.</p>

<h2>Push those sales!</h2>
<p>A vacuum salesman wants you to buy their vacuum. Their sole role is to push vacuum sales. They will tell you you need this new vacuum cleaner even if they don't actually know that you do. It's your job as the customer to push back and not buy one.</p>
<p>Let's for a moment assume that a lawyer's amount of cases and their outcome remain the same (some wins, some losses). By implementing contingency fees, this lawyer makes less money, because they don't get paid for losses anymore.</p>
<p>So what is a lawyer who is now making less money going to be incentivized to do? Make more money. How do they make more money? Either improve their win ratio, which they have little control over since the clients approach them, or significantly increase the amount of cases they handle.</p>
<p>Therefore, this lawyer will push for more cases. He'll be more inclined to urge a client to take something to court, given an acceptable ratio of win chance vs effort.</p>
<hr />
<h2>But I don't want a second job...</h2>
<p>The basis of your question isn't inherently wrong, but it forgets external factors. We can go back to the vacuum salesman.</p>
<p>If their salary was not based on the amount of vacuums they sell (= court wins), but rather the amount of houses they visit (= court cases), then the vacuum salesman has no reason to tell you that you need to buy their vacuum when you don't. Instead, the vacuum salesman can just <em>honestly</em> ask you if you need a vacuum, and know that he will be paid regardless of whether you buy one or not.</p>
<p>By putting vacuum salesmen on commission, which is the same as contingency fees for a lawyer, the vacuum manufacturer put pressure on the salesmen to push as many vacuums into as many houses as they can. And while this is reasonable from a capitalist perspective, it's a frightening thought for a judiciary system that's already trying not to buckle under a heavy workload even without that extra pressure.</p>
<p>If you assume that a lawyer didn't need the money they were making, you'd be right. If that lawyer would make an equal amount of money doing something else (e.g. building houses) and they would just as happily do that instead, then they wouldn't mind having a few less cases, because they can just go and build more houses.</p>
<p>But they're sitting on an expensive law degree. Doing other work makes the degree feel like a waste. Also, just like most people, they'd rather do the one job they're good at instead of having to work multiple part-time jobs. And they can't just part-time one job, because they still need to make a living.</p>
<p>All of these considerations lead to the highly likely and completely human behavior of lawyers on contingency fees wanting to go to court more than lawyers who always get paid.</p>
<hr />
<h2>Slippin' Jimmy McGill</h2>
<p>While I don't want to particularly explore this because it's a fringe notion, it does bear mentioning that such a system would also <em>wrongly but understandably</em> put lawyers who happen to lose many cases (through either random chance or lower skill) in a position where cutting corners or forcing a win through &quot;other&quot; means may become more alluring.</p>
<p>While that's not an excuse for any illicit behavior, nor am I claiming that there aren't already lawyers doing this; there is a reasonable argument to be made that a starving man will steal a bread when it's the only bread they can get, even if they think stealing is wrong. And if you don't want your bread to be stolen, then don't starve the man.</p>
<p>Essentially, you don't want to turn lawyers into Saul Goodman. Great character, horrible standard for lawyers.</p>
<hr />
<h2>Customer is king</h2>
<p>This answer didn't focus on the optional nature of contingency fees, to keep the explanation simpler. Accounting for that became a grammatical nightmare so I skipped it.</p>
<p>But clients are naturally incentivized to prefer contingency fees over regular fees (assuming reasonably contingency win fees), and <em>desirable</em> clients tend to move around in a buyer's market, so lawyers are pressured to give the client what they want.</p>
<p>If a lawyer refuses contingency fees when the client wants one, and it's a buyer's market, then the lawyer does not get the client. Instead, the lawyer will only get the clients who have little to no option in terms of legal representation, and those are less desirable cases for a lawyer (because if they weren't, they'd not be struggling to find legal representation).</p>

<p>When contingency fees are allowed they are generally (always?) allowed in addition to other types of payment structures. Therefore, they will almost certainly increase the number of lawsuits, since we can easily imagine an indigent client with no other means available (or known) to them of pursuing their case. And, equally, we can imagine that some of the lawsuits those clients might pursue are surely &quot;pointless&quot; by some metric we might agree on, but that an attorney somewhere might think is worth taking on contingency.</p>
<p>So, by this logic, we can feel that it is quite likely that adding an extra mode of payment to the list of those allowable will increase overall demand for legal services, but this is unsatisfying. A more satisfying answer would indicate not just whether a system that allows contingency fees produces a higher raw number of pointless lawsuits, but whether such a system has a <em>greater proportion</em> of them.</p>
<p>A definitive answer to this problem can obviously only be achieved by counting up some fraction of the lawsuits, defining which of them are &quot;pointless&quot;, and comparing the &quot;pointlessness ratio&quot; in systems with and without contingency fees (or, perhaps better, before and after introducing or eliminating them). But you asked why people <em>might argue</em> that there is an increase. @DJClayworth references lawyers who &quot;may as well work on this case as sit around and play solitaire&quot;. This gets at an important point: a contingency system allows some (or perhaps all) of the (financial) risk of a lawsuit to be shifted from the client to the attorney. And in many cases, attorneys may be better able to handle those risks. In some cases, simply because the attorney is wealthier than the client. But in others, because the attorney is largely risking his or her own time, and may place a much lower value on that marginal time than what the relevant fee would be.</p>
<p>In other words (and using very round numbers), if it would cost $1,000 to pursue a case with a potential payout of $10,000, then a rational client would only pursue such a case if there was more than a 10% probability of success. If an attorney took this on purely a 50% contingency, then they would require a 20% probability of success (as they are now risking $1,000 to gain $5,000), so they should be less likely to take the case. But this assumes the cost is the same on both sides. Let's say that of that $1,000 that $200 is fixed costs (filing fees, etc) and $800 is the attorney's time. If the attorney is fully booked at that rate, then the 20% probability would apply. But if (for whatever reason) the attorney has unbooked time, then their marginal rate might be much lower. They may value the time to take on the case (which they would have billed at $800) at a much lower value, say $100. Now the attorney is really risking only $300, and so only needs a payout ratio of 6%, lower than the clients.</p>
<p>One might argue that the same effect could be achieved by the attorney lowering his or her rates, but lawyers don't generally like to have sales. Just like airlines might sell discounted seats on flights departing soon, but don't advertise those prices too widely, opacity in this system is a feature, not a bug.</p>

<p>A number of answers make the valid and correct points that:</p>
<ol>
<li>Contingent fees improve access to law, especially for a party with fewer resources but a valid case; but</li>
<li>Contingent fees also increase the incentive for a lawyer to seek speedy settlements, even in a meritless case, from an opponent who may just want to get rid of a worthless case cheap than rack up fees to &quot;prove the point&quot;.</li>
</ol>
<p>An important collateral point is that the US system doesn't just have commonplace contingent fees. It <strong>also</strong> has a system of costs recovery where each side by default covers their own costs, even if they win.</p>
<p>That affects everything in the equation.</p>
<p>If your case is meritless, but arguable and not a blatant waste of court time, and it will cost me $5k to meet your settlement offer, or I can win in court, owe you nothing, but incur $9k legal fees of my own, contingent fees strongly incentivise a payout, and hence bullet #2, the incentive for a lawyer to push a meritless or extremely low merit case.</p>
<p>By contrast, compare the UK system where the general rule is that a losing party bears the costs not only of their own fees, but also those of the other party whom they opened an ultimately unsuccessful/unjustified legal case. The &quot;innocent&quot; other party, goes the logic, should not be left out of pocket by arbitrary others, unless they actually did wrong.</p>
<p>So now look what that does to the contingent fees equation.</p>
<p>In the UK the main type of contingent fees seen, are ambulance and compensation chasers (<em>&quot;Have you had an injury at work?&quot;</em>), and those seeking possible claimants for well known widespread matters (<em>&quot;Were you sold PPI insurance?&quot;</em>). The lawyers in these cases will usually assess any claim, and decide for themselves of the case is likely to succeed, because &quot;no win no fee&quot; means they either have to charge their client for the other party cost if unsuccessful (and many such parties won't have large savings), or suck up that cost themselves.  The UK court rules (&quot;CPR&quot;) are also heavily geared towards pushing claimants to resolve matters between themselves as far as possible, and to penalising behaviour and litigation tactics that waste court time.  There is still frivolous/meritless litigation, but a whole order of magnitude lower, and contingent fee cases have not tended to become such a route for hopeful scavengers.</p>
<p>So it's worth noting, it is not just the fact that fees are contingent, that's important in changing the incentives to litigate. Its also, how losing party legal costs are allocated.</p>
<p>If a winner, or a party with a good defence, will pay legal costs anyway, there will be a huge incentive to just settle and minimise losses whether right or wrong (US model, absent insurance). If the winner recovers fees from the loser, the incentives change as there is a much bigger incentive to defend, if you believe you'll win, and settle, if you believe you'll lose (UK model, absent insurance).</p>
<p><em>(Note: the counter argument to the UK model is the idea that the US model improves access to law for meritous cases, for plaintiffs lacking resources. Just to mention it for balance.)</em></p>
