In a scholarly article entitled “Contingency Fees, Settlement Delay and Low-Quality Litigation: Empirical Evidence from Two Datasets” from December 2002, the authors objectively researched the issue “whether legal quality is lower under contingency or hourly fees” in personal injury cases (in particular, medical malpractice cases), finding that “hourly fees encourage the filing of low-quality suits and increase the time to settlement (i.e. contingency fees increase legal-quality and decrease the time to settlement).” (emphasis in the original)
Contingency Fee Benefits
The authors stated that “[c]ontingency fees have several benefits that are well agreed upon. First, if clients are more risk averse than their lawyers, a contingency fee can increase net utility by allowing risk sharing. The assumption that lawyers are less risk averse than clients is reasonable because lawyers can diversify their portfolio of cases. Second, if capital markets are imperfect, clients may be unable to finance litigation even when such litigation has positive expected benefits. Contingency fees, in effect, let a plaintiff borrow money from a lender (his lawyer) who is better able to assess the value of the case than an external financier such as a bank.”
Quality of Legal Service Provided Under Contingency Fees
The authors stated, “In contrast to the conventional wisdom, the theoretical literature tends to reject the claim that contingency fees reduce quality.”
Contingency Fee Litigation Reduces Frivolous Lawsuits
The authors stated “[a]bsent a strong reputation constraint, lawyers paid under an hourly fee arrangement have little reason not to pursue frivolous claims,” and further stated, “[w]ithout the benefit of the signal from their lawyer’s acceptance or rejection, uninformed plaintiffs are likely to bring suits that they would not bring under contingency fees.”
Impact Of Contingency Fees On Expected Time To Settlement
The authors stated, “[t]he greater the portion of a lawyer’s fee that is based on hours worked the greater the incentive increase billable hours thus potentially delaying settlement time,” finding that “the time to settlement is 21% longer in cases that are contingency-fee limited” in the cases they studied. (“Interestingly, all of the statutes passed to limit awards tend to reduce the time to settlement. Capping non-economic damages, for example, reduces settlement time by 35.9%.”)
The authors concluded: “Whether or not a lawyer is willing to take a case on a contingency fee basis provides a strong signal to plaintiffs about the quality of their case. But an hourly fee encourages lawyers to advise their clients that the client’s case is worth pursuing no matter how low is the true chance of recovery. As a result, we find that when contingency fees are limited, plaintiffs file suit in many cases that they end up later dropping – an indication that limits on contingency fees cause a reduction in legal-quality. Similarly, under hourly fees lawyers have greater incentives to delay settlement and indeed we find that cases take significantly longer to settle when contingency fees are limited.”
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