Making Litigation Not Pay

Republican rule on Capitol Hill has put new wind in the sails of some dubious proposals for striking at the very real problem of wasteful and abusive litigation tactics.

"Reforms" like the English "loser pays" rule and numerical caps on damages, which are in the House Republicans’ Contract With America, would surely stop some unwarranted suits, but they would also thwart many injured people with legitimate claims.

There are some better ideas in the hopper-ideas aimed at slashing billions in wasteful litigation costs rather than shielding business from liability to injured individuals. One of the most intriguing, endorsed by an impressive array of legal luminaries, seems well-designed to help deserving plaintiffs get swifter, surer compensation and to ease the litigation burden on business (as well as on plaintiffs)-and all without limiting any plaintiff’s right to seek full redress.

What’s the trick? You guessed it: Take it out of the lawyers’ hide.

But this proposal is not the kind of crude, probably counterproductive fee cap that some states have passed. It is an ingenious, largely self-executing mechanism aimed at restricting contingent fees to cases in which lawyers really earn them, while promoting early settlements in the many cases in which liability is easy to establish.

Here’s how it would work:

Any plaintiffs lawyer seeking a contingent fee in a personal-injury case would have to notify each defendant of the claim and provide routinely discoverable information about the plaintiff’s injuries, medical costs, and the like. The defendant could then make a settlement offer within 60 days, also accompanied by relevant discoverable information.

If such an early offer were made and accepted, the plaintiffs lawyer-having done little work-would be limited to hourly fees, capped at 10 percent of recoveries up to $100,000 and 5 percent of any additional amount.

If the offer were rejected, on the other hand, and the litigation proceeded, the plaintiffs lawyer could collect a percentage contingent fee, but only to the extent that any eventual recovery exceeded the rejected offer.

The idea is to induce defendants to make reasonable, early settlement offers (with the assurance that the plaintiff knows he will get most of the money) in all cases in which the defendant expects eventually to be held liable; to give plaintiffs and their lawyers incentives to accept unless they believe they can win substantially higher amounts through litigation; and thereby to increase plaintiffs’ net recoveries while slashing both sides’ legal costs.

Newly incorporated into a tort-reform bill sponsored by Senate Republicans Mitch McConnell of Kentucky and Spencer Abraham of Michigan, this proposal was published a year ago in a highly persuasive monograph, Rethinking Contingency Fees, by Michael Horowitz, then a senior fellow at the conservative Manhattan Institute (and now at the Hudson Institute), and two leading tort-law scholars, Professors Jeffrey O’Connell of the University of Virginia School of Law and Lester Brickman of Yeshiva University’s Benjamin N. Cardozo School of Law.

Their proposal neither limits plaintiffs’ rights to sue for whatever damages they think they deserve, nor restricts contingent fees for recoveries in excess of the defendant’s initial offer, nor affects fees at all when no such offer is made. Rather, the proposal seeks to calibrate contingent fees to the value added by the plaintiffs lawyer, to bring the lawyer’s financial incentives more into line, with her client’s interest in accepting a reasonable early offer, and to offset the gross inequality in bargaining power between tort victims and lawyers who present them with contingent-fee contracts of adhesion.

As such, the Brickman-Horowitz-O’Connell proposal seeks to put teeth into the longstanding (but largely unenforced) ethical obligation of lawyers not to charge excessive fees. That includes (or ought to include) an obligation not to seek a windfall by taking a whopping "contingency" percentage of an award, the recovery of which requires relatively little effort by the lawyer.

Ethics rules notwithstanding, there is ample evidence that most personal-injury lawyers charge contingent fees ranging well above 33 (or even 50) percent, even in the many cases in which the defendant’s liability is clear and the risk of non-recovery small. Brickman, a leading scholar on contingent fees, estimates that lawyers collect as much as $10 billion annually in windfall contingent fees in can’t-miss cases.

"The gap between ethical rules and ethical reality is thus both massive and growing in contingency fee representations," as Horowitz has asserted. Some consumer advocates agree that ripoffs of clients by contingent-fee lawyers are a serious evil.

And while the direct effect of the proposal would be to restrict fees charged by plaintiffs lawyers, it is designed to slash defense lawyers’ fees as well-by making it cheaper for defendants to offer reasonable, early settlements than to unleash their lawyers to run up billable hours while waging costly (and often abusive) wars of attrition.

Any proposal as novel and complex as this one carries some risk of unanticipated consequences, of course, and should be adopted only after careful, critical scrutiny. Perhaps a compelling critique can be made of the Brickman-Horowitz-O’Connell mechanism. But I haven’t seen one yet.

Critics like Barry Nace, past president of the Association of Trial Lawyers of America, have mischaracterized the proposal as an attack on the whole contingent-fee system; have protested that contingent fees are often essential to give injured victims access to the courts (an argument with which Horowitz, et al., readily agree); have contended that windfall contingent fees for lawyers who add little value are relatively rare (which is a crock); have asserted that windfall fees provide lawyers with the money they need to bring long-shot suits for other plaintiffs (which sounds inconsistent, and perhaps unethical); and have attacked the Manhattan Institute, under whose auspices the proposal was developed, as a corporate front. (It does get corporate funding, but Brickman, Horowitz, and O’Connell are thoughtful policy analysts, not corporate whores.)

Some of the same critiques have been made by tort defense lawyers, who also profit enormously from the wasteful litigation encouraged by the current tort system. Scandalously, the system pays out more money in legal fees and expenses than it does in compensation to injured plaintiffs.

Of course, the Brickman-Horowitz-O’Connell proposal is no panacea for all the tort system’s problems. It would not affect the many cases in which liability is vigorously contested, and, as Horowitz has written, "there will always be need for contingency fee services when new or contested facts need be established or when, despite the proposal, recalcitrant defendants refuse to offer fair compensation to deserving accident victims." But it could have a dramatic effect in the many cases in which the defendant’s liability is clear.

Among the distinguished lawyers who have endorsed the basic concept are Derek Bok, former president of Harvard University and former dean of Harvard Law School; Professor Roger Cramton of Cornell Law School; Norman Dorsen, former president of the American Civil Liberties Union; Professor Mary Ann Glendon of Harvard Law School; Professor Thomas Morgan of the George Washington University National Law Center, Robert Pitofsky, now chairman of the Federal Trade Commission; and Harry Wellington, dean of New York Law School.

They, along with prominent conservatives like former Judge Robert Bork and big-firm practitioners like the late Erwin Griswold of Jones, Day, Reavis & Pogue, were among 26 signatories of a letter, sent in February 1994, urging the American Bar Association’s Standing Committee on Ethics and Professional Responsibility to specify that lawyers have an ethical obligation to solicit early offers and not to charge contingent fees against such offers. The ABA committee declined in its Formal Opinion 94-389, made public Jan. 18.

The Brickman-Horowitz-O’Connell proposal also has some populist support from (among others) Voter Revolt, a consumer group that has teamed up with some business leaders to push for a 1996 California ballot initiative modeled on Brickman-Horowitz-O’Connell.

Of course, the effort of Sens. McConnell and Abraham to impose such rules on state as well as federal courts may superficially seem at odds with Republican preachments against the federal government telling states what to do and messing with the free market. But the McConnell-Abraham bill bows to federalism concerns by authorizing state legislatures to opt out. And smart Republicans (and Democrats) should not let New Federalist or free-market absolutism get in the way of judicious efforts to cut the enormous legal waste engendered by the current tort system or to protect unsophisticated tort victims from overreaching by their own lawyers.

Will the Republicans who run Congress and the business lobbyists who want to roll back plaintiffs’ rights settle for reforms like this one? It may be too sensible, and too evenhanded, for their style. Then again, with the blessing of so many legal luminaries, Brickman-Horowitz-O’Connell might just have a chance of doing something that the business lobbyists’ pet proposals still seem unlikely to do: passing Congress.