Vol. 15 No.3 (March 2005), pp.250-254

RISKS, REPUTATIONS, AND REWARDS: CONTINGENCY FEE LEGAL PRACTICE IN THE UNITED STATES, by Herbert M. Kritzer. Stanford, CA: Stanford Law and Politics, 2004. 352pp. Cloth $45.00.   ISBN: 0-8047-4967-1.

Reviewed by Stephen Daniels, American Bar Foundation, Chicago, IL. Email: s-daniels@law.northwestern.edu .

Except for a handful of scholars, political science has largely ignored the civil justice system. This is despite the fact that civil justice reform has been a major political issue for over 20 years and despite the fact that the civil justice system is where most legal activity takes place and where who gets what, when, and how is regularly determined. Civil justice reform is animated by dissatisfaction on the part of some interests over that determination. Among the handful of scholars who have devoted their energies to studying this area is Bert Kritzer, who through a long series of articles and books has done path-breaking work on the civil justice system. With RISKS, REPUTATIONS, AND REWARDS: CONTINGENCY FEE LEGAL PRACTICE IN THE UNITED STATES, Kritzer provides another important work.

RISKS reports on Krtizer’s extensive research on the use of the contingency fee by lawyers in Wisconsin. The contingency fee – a practice with a long history in American legal practice (MacKinnon, 1964; Karsten, 1998) – is itself one of the reformers’ major targets. The reason is simple.  As Kritzer reminds us in his Conclusion, the contingency fee is about access to the system for those without the means to pay a lawyer to represent them. As he says, “from the perspective of the average citizen, contingency fees are about ‘access to justice’ through the mechanism of civil litigation, or the threat of civil litigation” [emphasis in original] (p.254). For those dissatisfied with the civil justice system’s determination of who gets what, when, and how, one avenue for change is to make it harder for people to use the system in the first place. Eliminating, limiting, or directly regulating the contingency fee all represent routes to that destination.

The debate over reforming the contingency fee is driven largely by anecdotes, horror stories, heated political rhetoric about crisis, and position papers by the interested parties rather than by sound empirical research. Motivating Kritzer’s investigation is the lack of sound empirical research and the idea “that considerations of change must start from a good understanding of the status quo” (p.267).  RISKS provides crucial empirical background for the political debate over the contingency fee, and earlier versions of the research reported in the book have entered that debate – as has Kritzer himself. [1]

The most controversial aspect of Kritzer’s work is his analysis of the “effective hourly rate,” a concept that has appeared in a number of his earlier pieces (Kritzer 1990; 1998) and it is an important part of RISKS. Kritzer uses this measure to compare the fees earned [*251] by lawyers using the contingency fee to those earned by lawyers using an hourly fee. It is only with such a measure, he would argue, that we can make any meaningful statements as to whether the contingency fees earned by lawyers are appropriate and whether it makes sense to reform the fee system.

Most simply, effective hourly rate is the fee received by the lawyer in a contingency fee matter divided by the number of lawyer hours invested in that matter (p.181). More useful Kritzer argues, given the risks incurred by lawyers in contingency fee matters, is to assess an effective hourly rate over some set of matters – in the aggregate (pp.182-83). [2] The ideal comparison for Kritzer involves lawyers who handle both contingency fee and hourly fee work and who also keep track of the hours invested in their contingency fee portfolio (or who can at least provide a reasonable estimate). Only a minority of his Wisconsin sample fit this ideal, but he reports that in the aggregate their effective hourly rates are not out of line with the lawyers’ own reported hourly rates.

Kritzer’s analysis of effective hour rates is much more sophisticated than this single example (pp.181-218). Applying multivariate techniques, it looks at the variation in effective hourly rate based on the characteristics of lawyers and of the matters handled. When all is said and done, Kritzer’s findings on the effective hourly rate fail to support the claims that there are widespread contingency fee abuses. He concludes, “there are clearly profits to be made from contingency fee work. For most lawyers handling cases on a contingency fee basis, it is a small subset of cases, typically the top ten percent, that produce the largest profits. However, the typical contingency fee practitioner can expect even the remaining 90 percent of cases as a portfolio to produce a fee premium on the order of 25 to 30 percent of what market-rate hourly fee work generates” (p. 218). This premium, Kritzer argues, is commensurate with the risks lawyers take in handling contingency cases. If there were not a modest premium, we would not expect lawyers to eschew the no-risk hourly rate for the riskier alternative.

Kritzer’s work on the effective hourly rate has been a target for those pushing for major changes in the use of the contingency fee. According to one reform advocate, Professor Lester Brickman, “On the basis of his [Kritzer’s] research, he [Kritzer] has challenged the thesis, which I have advanced, that contingency fees yield inordinately high rates of return. Indeed, Kritzer is the leading proponent of the position that the effective hourly rates of return of plaintiff attorneys are substantially the same as those realized by hourly rate lawyers in similar matters and is widely cited for that proposition” (Brickman 2003, 662-62). [3]  This quote comes from Brickman’s most pointed critique of Kritzer, in a law review article devoted entirely to a detailed refutation of Kritzer’s earlier research (Brickman 2003). In many respects RISKS is not simply the synthesis of his work on the contingency fee in Wisconsin. It can also be read as a vigorous and admirable response to the criticisms of his earlier work by reform advocates like Brickman, who has been Kritzer’s chief nemesis. [*252]

RISKS is based on a mixture of different methodologies and data: a mail survey of Wisconsin lawyers, semi-structured interviews of Wisconsin lawyers and insurance claims adjusters, and participant observation in three law offices. It is about more than just the effective hourly rate, and it has much to tell us about the use of the contingency fee and the lawyers who use it. There is a chapter on how lawyers in the Wisconsin survey get clients and how they decide which cases to handle. Contrary to what many might presume, advertising is not a major source of clients, and a relatively small proportion of potential cases are actually taken. Drawing from the observations and interviews is a chapter devoted to the work of lawyers who take cases on a contingency fee basis. Among the findings is the importance of efficiency. Lawyers using the contingency fee “want to run their practices efficiently because they profit from efficiency. This stands in contrast to lawyers working on an hourly basis, where one could argue that inefficiency, to the extent that clients will tolerate it, leads to increased profit” (p.137). Reminiscent of some of Kritzer’s earlier work from the Civil Litigation Research Project (Kritzer 1991), RISKS has a detailed chapter on settlement negotiations.

Perhaps most interesting is a chapter on lawyer reputation. The importance of reputation is among the most significant findings in RISKS. It helps explain how lawyers get cases, especially the cases with the greatest potential for profit, and how settlement negotiations will play out. A lawyer’s reputation will help determine how the other side will behave, the nature of the settlement offers, and ultimately the outcome. Kritzer ends this chapter by reminding the reader of the classic quote from Publius Syrus that “a good reputation is more valuable than money” and then saying, “For the contingency fee lawyer, a good reputation is money, because having a ‘good’ reputation along the right dimensions is central to a profitable contingency fee practice” (emphasis in original) (p.252).

RISKS is not without some weaknesses, and two are worth mentioning because they may cause some confusion in interpreting the findings: the use of the term “contingency fee lawyer,” and the discussion of “modern portfolio theory.” The concept “contingency fee lawyer” is introduced on page 2 after a quick discussion of recent criticisms and attacks on what are called “trial lawyers,” also described as “plaintiffs’ lawyers” or “ambulance chasers” (p.1). Contingency fee lawyer is used broadly to include these lawyers as well as the attorneys in his Wisconsin data base. My concern is that the term is used too broadly for what is actually covered in RISKS and may give the wrong impression of who is being studied.

When we use an adjective in front of “lawyer” we usually do so to distinguish one particular group from another. This set of lawyers is then assumed to share some key characteristic. When that characteristic describes an area of legal practice, we normally understand this as specialization – such as divorce lawyers or probate lawyers.

In RISKS, what defines the lawyers studied is that they handle some amount of business on a contingency fee basis and are members of the Litigation Section of the state bar association. For [*253] most of these lawyers, such work does not really define their practice. They occasionally, perhaps infrequently, take contingency fee cases. They are not specialists as the term contingency fee lawyer could be interpreted to mean (pp.27-28). Only one-third of the lawyers in the study are identified as personal injury specialists, a group that could fairly be described as contingency fee lawyers because the bulk of their practice consists of such work (p.27). Raising this issue does not diminish the value or importance of RISKS; it is merely an interpretation caveat.

In order to provide a framework for interpreting his findings, Kritzer uses the idea of a “portfolio” and views lawyers as managers of a portfolio of cases. Contingency fee cases are, to varying degrees, risky because outcomes are uncertain, and lawyers must find ways to deal successfully with risk across their practice – the portfolio – to make a profit. Used heuristically, this idea works very well because it raises a series of useful and interesting questions whose answers provide a deeper understanding of lawyers’ work and their use of the contingency fee (pp.10-19).

Chapter One introduces the portfolio analogy, but it is not clear whether the idea is to be used as a heuristic or whether something more specific and rigorous is intended. The possibility for confusion arises with discussion of “modern portfolio theory” (a sophisticated theory taken from the world of investments) and the occasional reference to it throughout the remainder of the book. Modern portfolio theory does not seem to fit very well here as a source of theoretical explanation. It is a way of dealing with risk and uncertainty through asset allocation over some time horizon given an acceptable level of investor risk. Variation in risk tolerance and time horizon will lead to different mixes of investment. The key is asset allocation or diversification – spreading the risk over a mixed set of holdings rather than concentrating on one class or closely related sets of investments. Put simply, don’t put all of your eggs in one basket.

Although Kritzer’s lawyers spread their risks across a number of cases, there is no evidence of optimization of asset distribution, consideration of time horizons, or calculation of the amount of risk that is tolerable. To follow the logic of modern portfolio theory, we would expect most lawyers to be generalists and few to be specialists of any kind, but only 21% of the lawyers in the survey characterize theirs as a general practice (RISKS, 27). The remainder report concentration of work in a particular substantive practice area. In a sense, they put all, or most, of their eggs in one basket. If nothing else, Kritzer’s Wisconsin lawyers are at least somewhat specialized, as indicated by membership in the State Bar’s Litigation Section.

The reality is that, to varying degrees, attorneys specialize. Rather than dealing with risk by diversification, they look to carve out substantive practice niches in which they can very carefully choose the specific matters to handle in order to eliminate as many risky or questionable situations as possible. This is perhaps best illustrated by the institutionalization of specialization through certification programs by state bars and private affinity organizations.  For instance, in Texas a lawyer can become certified by [*254] the Texas Board of Legal Specialization in 20 different areas of practice. Among them are civil trial, personal injury trial, civil appellate, criminal, family, and farm and ranch real estate. Again, raising this issue does not diminish the value or importance of RISKS; it is just a caveat about interpretation.

My concern over the possibility of confusion regarding “contingency fee lawyers” and “modern portfolio theory” should not be taken as a lack of enthusiasm for RISKS. It is an excellent piece of scholarship that adds substantially to our understanding of the contingency fee and speaks to important public policy issues.

REFERENCES:

Brickman, Lester. 2003. “Effective Hourly Rates of Contingency Fee Lawyers: Competing Data and Non-Competitive Fees.” 81 WASHINGTON UNIVERSITY LAW QUARTERLY 653-736.

Karsten, Peter. 1998. “Enabling the Poor to Have Their Day in Court: The Sanctioning of Contingency Fee Contracts, a History to 1940.” 47 DEPAUL LAW REVIEW 231-260.

Kritzer, Herbert M. 1990. THE JUSTICE BROKER: LAWYERS AND ORDINARY LITIGATION. New York: Oxford University Press.

Kritzer, Herbert M. 1991. LET’S MAKE A DEAL: NEGOTIATIONS AND SETTLEMENT IN ORDINARY LITIGATION. Madison: University of Wisconsin Press.

Kritzer, Herbert M. 1998. “The Wages of Risk: The Returns of Contingency Fee Legal Practice.” 47 DEPAUL LAW REVIEW 267-319.

MacKinnon, Frederick Benjamin 1964. CONTINGENT FEES FOR LEGAL SERVICES: A STUDY OF PROFESSIONAL ECONOMICS AND RESPONSIBILITIES. Chicago: Aldine Publishing Company.

*************************************************

© Copyright 2005 by the author, Stephen Daniels.