How does tort reform affect attorney fees?

The proposed tort reform amendment – SJR 8 – would regulate attorneys’ contingency fees. A contingency fee contract typically pays the lawyer only for good performance: that is, the lawyer will only get paid if he or she wins at trial or settles the case to the client’s benefit, for instance. The typical defense of contingency fees lies in the fact that many people cannot afford to pay an attorney’s hourly rates, and are therefore better off letting the attorney have a piece of the result in exchange for paying little or nothing up front.
Tort reform under SJR 8 would cap the available percentage in lawyers’ contingency fees contracts. In such contracts, the lawyer is paid a pre-arranged portion of the money that the client recovers, generally between 30% and 40%. SJR 8 would limit the lawyer’s share to no more than one-third of the net recovery of the action – another way to put this is that the lawyer could take no more than one-third of the lawsuit’s profit. Nearly half of the 50 states currently regulate attorneys’ contingency fees.

Contingency fee arrangements need special attention by policymakers, because their unique circumstances lend themselves to abuse. Large contingency fees can provide incentives for lawyers to take cases with shaky claims in the hope of a big payout. The contingency fee system can also lead lawyers to receive large payments for little work, with respect to those cases which would have settled with or without the lawyer’s assistance. Capping these fees at 33 1/3% would curb these abuses and still preserve this option for Arkansans who need it.

Arkansas recognizes that contingency fees can be dangerous in other contexts. Lobbyists and doctors can’t be paid on a contingency basis; lawyers aren’t supposed to be paid on contingency in cases involving child custody or criminal liability. In such cases, we all understand that paying someone to achieve a desired result could create incentives that could be highly detrimental to the client. Indeed, the Arkansas Rules of Professional Conduct state that only “reasonable” contingency fees are permissible, which I think demonstrates that Arkansas’s legal community recognizes that there is such a thing as a contingency fee that is just too big.

But the central argument for contingency fee regulation is one that is not always fully appreciated even by lawyers – which is that every attorney-client relationship is, at bottom, a fiduciary relationship. It is a serious misunderstanding of attorney-client relationships to understand them as conventional business deals. As Marc Kilmer wrote in a recent article for us:

To sum up: I like freedom of contract. But it’s puzzling that some self-styled conservatives seem to think that all contracts should be honored, even those which plainly violate professional ethics — in particular, contracts that violate the fiduciary duty of agents to respect the interests of their principals. Suggesting that free markets should operate inside of fiduciary relationships is a serious misunderstanding of the way that fiduciary relationships are supposed to work.


Let me repeat: The attorney-client relationship has consequences — clients believe that they can tell their attorney things in confidence, and can rely on the attorney for disinterested advice, because they have been told that the attorney will respect and advance the client’s interests. The attorney-client relationship is fundamentally different from the relationship between two businesspeople at the bargaining table; indeed, the attorney-client relationship is supposed to take certain kinds of business deals between attorneys and clients off the table. (That’s why whenever an attorney makes a business deal with a client, the attorney is required to advise the client — in writing — that it would be a good idea to get a second lawyer to look over everything to ensure that it respects the client’s interests.) An unscrupulous attorney’s departure from professional ethics shouldn’t be honored … The practice of law is highly regulated, and one reason it’s regulated is that lawyers who pay insufficient attention to the interests of their clients can easily end up with a conflict of interest. The notion that it’s impossible for lawyers to rip off their clients by means of contingency fees is a very strange idea.

Contingency-fee contracts are regulated differently than other contracts. Lawyers are generally subject to legal disciplinary standards, not to consumer law. In other words, lawyers police lawyers using standards written by lawyers. Legal protections available to consumers in other cases – for instance, regarding exploitative contracts – are not available when dealing with legal contracts. Tort reform is necessary to ensure that consumers are treated fairly. That is why regulating contingency-fee agreements (which we support) is very different from regulating most other contracts; those who respect limited government, as we do, will generally oppose the regulation of contracts between consenting adults, but the regulation of contingency fees – falling as it does into the land of fiduciary relationships – is a principled exception to that rule.

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