Vol. 70, No. 8, August
1997
Investing in Cases:
Can You Profit
from Contingency Fee Work?
By Herbert M. Kritzer
"I'm in contingency fee cases to beat my hourly rate," said
one Wisconsin lawyer interviewed in 1996 about his contingency fee practice.
Presumably this lawyer believed that, at least on average, he was able to
exceed his hourly rate in the contingency fee cases he handled.
Some lawyers, those with struggling or marginal practices, might routinely
take
Contingency fee work, across a set of cases, produces profits
over what lawyers can charge on a normal hourly basis, but for most lawyers
it is not the path to riches. |
contingency fee cases expecting returns below what they would earn from
hourly fee work because they do not have clients willing or able to hire
them on an hourly basis. 1 Lawyers not in this
situation should expect to earn more than on an hourly basis because the
services they provide to their contingency fee clients go beyond legal representation
to include financing the case and insuring against the costs of losing the
case. It simply would not be economically rational for lawyers who have
alternative uses for their time to take cases on a contingency fee basis
expecting to net less than their hourly rate. While lawyers might take "unprofitable"
cases out of sympathy for the client or because a particular case might
facilitate future, more lucrative cases, most lawyers doing contingency
fee work usually have the goal of doing better than they would from hourly
fee work.
Critics of contingency fees have argued that lawyers not only beat their
hourly rate, but that they regularly obtain "effective hourly rates"
that are grossly excessive. 2 As with most aspects
of contingency fee practice, little is known about the parameters of the
contingency fees that lawyers charge or earn. What little knowledge that
does exist focuses on the perception that lawyers usually charge a one-third
contingency. Whether that is true, and how such fees routinely translate
into return per hour is something about which we have very little information.
3
Data collected for the Wisconsin Contingent Fee
Practice Study provides systematic information on the contingency fees
charged and earned in Wisconsin. 4 The following
discussion draws upon the responses of 511 Wisconsin lawyers who do at least
some work on a contingency fee basis; these lawyers provided information
on 989 contingency fee cases. The analysis also draws on extended observations
in the offices of three different lawyers and semi-structured interviews
with 47 plaintiffs' lawyers, defense lawyers and insurance adjusters.
Contingency fees Wisconsin lawyers charge
For some types of cases handled on a contingency basis, law or regulation
limits the fees that lawyers can charge. For example, in worker's compensation
cases, the fee can be no more than 20 percent; in Social Security disability
cases, the fee typically is limited to 25 percent of back benefits; in Wisconsin
medical malpractice cases, attorneys can charge up to 33.3 percent of the
first $1 million in damages recovered and 20 percent of recoveries over
$1 million. 5
Interestingly, even eliminating these cases, only 53 percent of the cases
in the sample of Wisconsin contingency fee cases involved a retainer agreement
calling for a flat one-third contingency fee.6
(See Figure 1.) Another 5 percent called for
a flat fee of some different fraction, almost all less than one-third. Some
of the lawyers interviewed said that in cases where the potential client
came in with an offer in hand, the fee might be as high as 50 percent of
any amount over the offer in hand. Some lawyers in this situation would
charge the lesser of 50 percent of the increment obtained over the offer
in hand or 33 percent of the total recovery.
Retainer agreements call for a graduated contingency fee, depending upon
the timing of disposition, in 39 percent of the cases. Figure
2 shows the range of fees offered at each stage of disposition. Such
fees can work to both the client's and lawyer's advantage. For the client,
it can mean keeping more of the recovery. For the lawyer, it can provide
a powerful tool to convince a client to accept a settlement because the
client can actually net more on a smaller settlement where the fee is only
25 percent and that avoids incurring costs associated with experts (for
example, pretrial depositions, trial preparation and appearance at trial).
The remaining cases (3 percent) involved some other type of contingency
arrangement, including:
- an hourly fee up until some specified point, plus a percentage after
that;
- an hourly fee capped by a percentage of the recovery;
- a premium hourly rate, with no fee if there is no recovery;
- a reduced hourly rate or a flat fee, plus a reduced percentage or a
bonus based upon recovery.
In reality the retainer agreement normally establishes the maximum fee
the lawyer can charge. In a significant fraction of the cases in the sample
(18 percent), the lawyers charged a fee less than what the retainer agreement
entitled them to. The survey did not ask why these reductions occurred.
The follow-up interviews suggest two primary reasons:
1) The lawyer's perception that taking a smaller fee would facilitate
a settlement (the client might be more likely to settle if the legal fee
was cut from 33 percent to 30 or 25 or even 20 percent).
2) A view that the lawyer should not recover more than the client. In
cases in which substantial payments were made to subrogated parties, lawyers
often reduced their fee, splitting 50-50 with the client what was left after
paying the subrogated claims.
Occasionally, when a case resulted in an unexpectedly small recovery,
the lawyer simply waived the minimal fee he or she was entitled to. If a
client is in a good position to refer future clients to the lawyer, the
lawyer might waive a fee on a small case to generate goodwill. 7
Effective hourly rates
What kinds of returns do contingency fee lawyers obtain from their work?
The best way to look at this is in terms of the effective hourly rate: the
fee received divided by the hours devoted to the case. Information was available
to estimate an effective hourly rate for 878 cases. The median hourly rate
among the sample of cases is $132, with half of the cases falling between
$61 and $269. Interestingly, most of the lawyers in the sample did at least
some hourly fee work, and the median rate they charged was $125 per hour.
If this were the end of the story, one might wonder why most lawyers bothered
with contingency fee work because these figures seem to show that these
lawyers do about the same whether they charge on an hourly basis or a contingency
basis.
The picture changes when the focus shifts to the mean effective hourly
rate rather than the median. The mean across the sample is $242 (the mean
for hourly fee basis work stays at about $125). This $242 figure seems to
show that lawyers do considerably better on a contingency basis across a
set of cases, although the disjuncture between the mean and the median also
suggests that the "profit" comes from a relatively small subset
of cases.
As it turns out, the mean across cases probably also presents a somewhat
distorted picture. If the goal is to estimate what a lawyer earns from the
typical hour he or she spends doing work on a contingency fee basis, the
median is an understatement and the mean is an overstatement because it
treats all cases as equal without considering that some cases may require
a lot of time and others relatively little time. An alternative estimate
is the sample-wide per hour return which is computed by dividing the sum
of the fees across all cases in the sample by the sum of the hours. This
yields a sample-wide mean hourly return of $169.
On a case-by-case basis, it appears that lawyers' returns from contingency
fee work do not differ substantially from the median rate charged for hourly
fee work. But across a set of cases, the contingency fee lawyer does better
than the median hourly rate. This was best expressed by one lawyer who had
a very high-volume practice. He said 60 to 70 percent of his gross fees
came from perhaps a dozen of the cases he closes each year; in most of his
cases he was lucky if he met the costs of running his practice. In fact,
if the 10 percent most profitable cases are eliminated (trimmed) from the
sample, the sample-wide per hour return for the remaining 90 percent of
cases is $104; the "trimmed" mean effective hourly rate for this
same 90 percent is $136. Figure 3 shows the five different estimates, including
the median, the mean, the sample-wide per hour return, the "trimmed"
sample-wide per hour return and the "trimmed" mean.
Effective hourly rates vary systematically both with certain case factors
and with certain lawyer factors. The three strongest effects relate to stakes,
the stage at which a case is resolved and the volume of cases handled by
a lawyer. (See Figure 4)
Stakes. Not surprisingly, the higher the expected recovery in
a case, the higher the typical effective hourly rates that lawyers obtain.
For example, the median for cases involving less than $20,000 was $113 compared
to $178 for cases more than $50,000.
Disposition. Given that the effective hourly rate can go up either
if the numerator (that is, a percentage of the amount recovered) increases
or the denominator (that is, the number of hours of attorney effort) decreases,
it is not surprising that effective hourly rates tend to be higher for cases
resolved without filing (median, $166) than for cases filed (median, $144)
or tried (median, $89).
Caseload. The effective hourly rate tends to rise as the lawyer's
volume of contingency fee cases increases. The median for cases handled
by lawyers who disposed of 10 or fewer cases was about $110 compared to
$140 or more for cases handled by lawyers disposing of more than 10 cases
(median in the $140 to $155 range). More importantly, the higher volume
lawyers tend to get a larger proportion of more lucrative cases as evidenced
in the 75th percentile: around $200 for those handling 10 or fewer cases,
$250 for those handling 10 to 25 cases, $330 for those handling 26 to 100
cases, and $450 for those handling more than 100 cases. 8
Lawyers with higher volumes may have succeeded in achieving efficiencies
in how they process cases. In fact, the median time spent by the highest
volume lawyers is lower (25 hours) than for any of the other groups (all
of which have medians in the range of 40 to 50 hours). While one interpretation
relates to efficiencies, it also might mean that lawyers in high-volume
practices accept lower settlements, but still generate higher hourly rates
because they invest less time. The data do not make it possible to distinguish
between these two explanations.
Beyond these patterns there are several other trends worth noting.
- Across types of cases defined by area of law, the median is highest
for auto accident cases and lowest for medical malpractice.
- Effective hourly rates obtained by women lawyers tend to be lower than
those obtained by men. The reason for this pattern is not clear, although
it may reflect some other patterns such as experience or position in a
firm (partners generate a slightly higher median effective hourly rate
than do solo practitioners or nonpartners).
- The impact of experience is mildly positive with the medians moving
consistently (although only slightly) higher as number of years in practice
increases.
Due to the way the sample was constructed, cases that went to trial are
overrepresented and cases handled by high-volume lawyers are underrepresented.
In the sample, 41 percent of the filed cases went to trial while less than
5 percent of cases actually make it to trial. Given that both disposition
and volume are associated with the return lawyers earn from their time investment,
the sample needs to be adjusted to more accurately reflect who handles cases
and how the cases are disposed. This was done using a set of case weights,
first to adjust for disposition and then adding a further adjustment for
case volume. (See Figure 3 .)
As one would expect, after the adjustments, the mean and medians are
higher. Adjusting just for disposition, the median rises from $132 to $154,
the mean from $242 to $267 (the trimmed mean rises from $136 to $162), and
the sample-wide mean hourly rises from $169 to $198 (trimmed from $104 to
$124). Adding in the second adjustment for case volume, the median is $171,
the mean is $317 (trimmed mean is $171), and the sample-wide mean hourly
is $221 (trimmed is $161). 9 This weighting
shows that there are profits to be made from contingency fee work. Even
after eliminating the top 10 percent of cases that produce the significant
profits, the fee premium over a portfolio of cases amounts to at least 25
to 30 percent of what hourly fee work generates, and for those with large
volumes, or a "lucky hit," the premium is much more.
Conclusion
Contingency fee work, taken as a whole, produces profits over
what lawyers can charge on a normal hourly basis. Contingency fee work can
be lucrative, particularly for those lawyers who develop expertise and processes
for handling many cases. High profitability tends to come from either locating
a small segment of cases that produce extremely good returns on the lawyers'
investment of time or from the efficiencies that can be achieved in a volume
practice.
While contingency fee work is, on average, profitable relative to hourly
fee work, for most lawyers it is not the path to riches. Some lawyers are
extremely selective (a small number of lawyers in the sample take 5 percent
or fewer of the potential cases that come their way), and get a significant
number of highly profitable cases. However, relatively few lawyers ever
see "the really big one." One lawyer had been doing plaintiffs'
contingency fee work for 20 years, had a very successful practice, and had
never collected a fee of more than $100,000 on a case.
|
Herbert M. Kritzer
is professor and chair of political science and professor of law at the
University of Wisconsin - Madison. He has conducted extensive empirical
research on the American civil justice system and on other common law systems. |
The profits from contingency fee work come not from the individual case
but from the portfolio of cases that a lawyer handles. Some of the "investments"
in that portfolio do poorly (some are disasters), many do okay and a few
do extremely well. As with any type of investment strategy, one must look
at the returns from the portfolio as a whole rather than focus on single
investments (or cases). Taking the sample as a whole, contingency fee work
is more lucrative than the kind of hourly fee work most of the lawyers in
the sample can or could expect to get. But compared to some of the hourly
rates charged by Wisconsin lawyers, 10 the
sample-wide mean of $221 per hour can be described as no more than a very
good return on the investment of time.
Editor's Note: A longer version of this paper will appear in
the DePaul Law Review as part of a symposium based on the Conference on
the Contingency Fee, DePaul University College of Law, Chicago, Ill., held
in April 1997
Endnotes
1See Jerome E. Carlin, Lawyers on
Their Own: A Study of Individual Practitioners in Chicago (New Brunswick:
Rutgers University Press, 1962).
2See Lester Brickman, Michael J. Horowitz
and Jeffrey O'Connell, Rethinking Contingency Fees (Washington, D.C.:
The Manhattan Institute, 1994) at 22; see also Lester Brickman, Contingent
Fees Without Contingencies: Hamlet Without the Prince of Denmark? 36
UCLA L. Rev. 29 (1989); Brickman, On the Relevance of the Admissibility
of Scientific Evidence: Tort System Outcomes are Principally Determined
by Lawyers' Rates of Return, 15 Cardozo L. Rev. 1755, at 1774-82 (1994).
3 Two prior studies provide direct information
on effective hourly rates earned from contingency fee cases based upon scientifically
drawn samples of cases. The first, from the early 1970s, considered only
medical malpractice cases based upon a survey of 671 lawyers. It reported
mean effective hourly rates for plaintiffs' lawyers in the $61 to $84 range
(the range reflects uncertainty about co-counsel and referral fees); this
compared to a mean hourly rate charged by medical malpractice defense lawyers
of $47. See Stephen Dietz, C. Bruce Baird and Lawrence Berul, "The
Medical Malpractice Legal System," Appendix: Report of the Secretary's
Commission on Medical Malpractice [DHEW Publication No. (OS) 73-89]
(Washington, D.C.: Department of Health Education and Welfare, 1973), at
113-16.
The second published study looked at a sample of federal and state cases
in five federal judicial districts from the late 1970s. In this study the
overall median effective hourly rate in contingency fee cases was $42 (the
mean was $89); for comparison, the median hourly rate reported by hourly
fee lawyers in the same study was $50. See Herbert M. Kritzer, The
Justice Broker (New York: Oxford University Press, 1990), at 137-46.
4 This is the second report of analyses from
the project. The first question examined the screening practices of contingency
fee lawyers. A brief report of that analysis is found in Holding
Back the Floodtide: The Role of Contingent Fee Lawyers, 70 Wis.
Law. 10 (March 1997). The next product from the research is a paper entitled,
"Contingent Fee Lawyers
and Their Clients: Settlement Expectations and Settlement Realities."
5 Wis. Stat.§ 655.013; in the unusual
case where the defendant stipulates to liability within 180 days of the
case being filed, the fee is limited to 25 percent of the first $1 million,
plus 20 percent over $1 million.
6 While the fee usually is described as being
based on the gross recovery (that is, before the lawyer is reimbursed for
expenses), some lawyers treat the gross recovery for fee computing purposes
as the recovery less any payments to subrogated interests. Even when they
do not do this, lawyers typically seek to get the subrogated parties to
take a reduced payment which serves to net more for the client (or to have
the subrogated party pay a share of the attorney's fee).
7 In the sample, slightly more than 1 percent
of the cases in which some recovery was obtained, the lawyer collected no
fee.
8 The means for the five groups of lawyers
are $186, $206, $198, $287 and $392.
9 Adjustments on adjustments can lead to unstable
results. The data showed that after making the second adjustment lawyers
from one firm had a great deal of impact on the mean hourly rate (but relatively
little impact on the median or the sample-wide mean). Those respondents
were omitted in computing the statistics after adjusting for both disposition
and case volume.
10 See Firm-by-Firm Sample of Billing
Rates Nationwide, Nat'l L.J. (Dec. 19, 1994), § C, at 6 (a top
rate at Foley & Lardner of $210 for associates and $335 for partners
in 1994); or Firm-by-Firm Sample of Billing Rates Nationwide, Nat'l
L.J. (Dec. 2, 1996), § B, at 11 (a top rate at Quarles & Brady
of $160 for associates and $310 for partners in 1996). |