The Risks of Malpractice Cases
The Wisconsin Contingent Fee Practice Study

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

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).