Attorney: So tell me what happened.

Client: Well, you see, I was at a red light and from out of nowhere, this car broadsides me!  My back hurts and I just feel achy all over.  I think I easily have a $100,000 claim.

This paper will discuss the history of the contingent fee from its early developments to its present use.  While the fee is usually associated with personal injury cases such as the fictional description above, the contingent fee has other uses.  This paper will discuss the use of the contingent fee in collections as well as personal injury.  One of the sources is an attorney, referred to as "TV," who uses the contingent fee in his law practice.  TV uses the contingent fee for personal injury as well as for collection in practice.

The purpose of this paper is to set forth the history of the contingent fee in an unbiased manner.  From its inception, the fee has generated much criticism.  Much of the criticism is similar through the years, while some has changed, and this paper will explore both the past and present.  Additionally, this paper aims to present a clear picture of the fee for both those in practice and those soon to enter the profession.  For those about to enter the profession, this paper attempts to educate attorneys on some of the ethical considerations she must take into account with regard to contingent fee practice.

Background and Development

A contingent fee is "a contractual arrangement whereby an attorney agrees to represent the client with the compensation to be a percentage of the amount recovered for the client."2  A website adds, "the contingent fee arrangement allows individuals and businesses that could not otherwise afford legal representation to hire experience and competent counsel."3  The "contingency" is that the attorney takes the risk of receiving no fee at all, thus, if a case is quite simple and does not involve much work, there is not much of a contingency.4  This situation presents an issue that will be discussed later in the paper.  One article describes the contingent fee by stating; "the client's exposure to loss is limited by the attorney's assumption of the fee risk, while the client's potential gain is also limited by the 'sale' of a percentage of the claim to the attorney."5  In effect, both parties are taking a risk: the attorney by accepting the case, and the client by choosing the attorney.

As the contingent fee developed, courts handled the contingent fee agreements in different ways.  In its early days, and even in some recent cases, courts have found it necessary to distinguish between a contingent fee arrangement and champerty.  Champerty is "an illegal bargain between one person (called a champertor) and a party to a lawsuit whereby the champertor carries on the litigation at his or her own expense and shares whatever is recovered."6  The following cases addressed the issue of whether the agreement fell within the definition of champerty.  For example, in Peck v. Heurich, the United States Supreme Court invalidated a contingent fee agreement that awarded the attorney a one-third interest in real estate.7  In its opinion, the Supreme Court quoted the District Court:
His compensation was not a fixed sum of money, payable out of the proceeds of sale, but a contingent share of the very thing to be recovered, or of the money that might be received by way of settlement of compromise; and the character of the enterprise, on the part of the attorney, was so plainly a speculative one, that in the deed the net results to him are mentioned as 'profits.'8

The District Court went on to discuss what constituted a champertous agreement and concluded that the agreement in the current case fit the definition.
We must regard an agreement by any attorney to undertake the conduct of a litigation on his own account, to pay the costs and expenses thereof, and to receive as his compensation a portion of the proceeds of the recovery, or of the thing in dispute, as obnoxious to the law against champerty.9

 A later case agreed with this analysis.  The Ninth Circuit Court of Appeals discussed champerty, and that a contingent fee agreement was not champertous "unless he [the attorney] assumes the risks of the litigation by relieving or indemnifying his client from all costs and expenses of the same."10  In this case, the contingent fee agreement did not state that the attorney would pay the costs, so the Court deemed the agreement valid.  Additionally, the Court stated that it would not invalidate a contingent fee agreement for champerty or as against public policy if an attorney advanced costs for the client.11  Therefore, if the contingent fee agreement did not address the issue of the attorney paying the costs for the client, or if it stated that the attorney was merely advancing the money to the client, then the agreement would stand.

However, an even earlier case handled the contingent fee issue in another light.  The Supreme Court of North Carolina did not discuss the contingent fee agreement in terms of champerty or as a professional responsibility issue as later cases do.  Rather, the Court looks at the contract between the attorney and the client and determines the client did not give any consideration for the attorney's promise to represent him.12  Thus, the North Carolina Supreme Court chose a different route, and deals with the issue purely as a contract law issue.

Courts seemed to view a champertous agreement as involving deceit on the part of the attorney, as seen through the above cases.  Additionally, if the parties based recovery on something involved in the lawsuit, such as part of a tract of land, then the court usually considered the contract a champertous agreement.
The contingent fee has had an illustrious history.  It started in practice, and has evolved into statutes.13  While this paper does not deal with any specific state statutes, it addresses the Rules set forth in the Model Code of Professional Responsibility and the Model Rules of Professional Conduct.14  However, it is interesting to note that in the United States, only Maine prohibits the use of contingent fees.15  Due to the statutory progression, courts do not often deal with champerty in cases anymore, rather, courts look at many contingent fee contracts as a professional responsibility issue, which will be discussed later in the paper.

Contingent Fee Use

Personal Injury

Although the contingent fee in not limited to personal injury cases, they do constitute the largest share of contingent fee cases.  Personal injury cases can include everything from car accidents to dog bites, and slip and fall cases.  In many of these cases, the recovery is relatively small, but for that reason, they are not the ones the public hears about.16  Class actions against the tobacco companies are more likely to make the evening news.  However, most attorneys will never see cases of that magnitude.

 Attorney TV discussed his firm's use of the contingent fee in personal injury cases.  He said that only one attorney in the firm handles the personal injury cases.17  They make sure to record the statute of limitations, and send out monthly reports to the client so the client can update the firm on her injuries and claims.18  He added that the firm attempts to settle the cases, and, if that is not possible, will file suit for a client.19

Collection

Contingent fees are also used in collection cases.  Creditors, from small businesses to medical professionals turn over delinquent accounts to collection agencies that hire attorneys to handle the legal aspects.  Instead of billing an hourly fee, the lawyer may take a share of what is collected. The attorney's fee is contingent on the amount of the accounts the attorney is able to collect, through the use of both judicial and non-judicial means.  Non-judicial means is the first step for many suits in Attorney TV's firm.  The firm receives a list of debtors and creditors, as well as information regarding the debt.20  The firm then sends out an "attorney letter" to the debtor.21  The letter explains to the debtor that if she does not remit payment on a particular bill or bills the firm will commence a lawsuit.22
Attorney TV The attorney above discussed his firm's use of the contingent  fee with regards to collection.  "The firm has a collection agency as a client.  The percentage we receive depends on the creditor, but is usually fifteen percent of the amount recovered."23  He went on to explain that the parties have an oral agreement regarding the percentage, and this pertains both to any suits the firm initiates as well as "attorney letters" the firm sends to debtors.24  The collection agency covers the costs.25  However, the attorney receives a percentage in lieu of a set fee for court appearances and other professional services.26  Therefore, it is in the attorney's best interest to recover as many debts as possible.

Support and Criticism of the Contingent Fee, Yesterday and Today

The most prevalent argument supporting the contingent fee is the access to the legal system it provides for those who would otherwise be unable to afford representation.27  Contingent fees made it possible for the poorest in society to have her day in court.28  The Association of Trial Lawyers of America has a brochure on its Internet site outlining the different arguments for the contingent fee.  Not surprisingly, it strenuously supports it.29

Notwithstanding these advantages, from its inception, the contingent fee has garnered much criticism.  One critic, Cohen, writing in 1916, stated that the use of the contingent fee is "to-day [sic] at the root of much of all the evils in the practice of the law."30  In contrast to the general understanding that the use of the contingent fee is beneficial for those unable to afford an attorney otherwise, Cohen argues that the fee is "more often a convenience for the rich to join with a lawyer in speculation over the results of a lawsuit."31  As for collections, asserts "the lawyer is put to the temptation of earning more by serving himself, at the possible expense of his client."32  As seen in Attorney TV's comments above, the attorney is not paid unless he or she takes action on the collection agency's claims.  In that case, there is little possibility that the attorney, in putting forth his or her interest in collecting on more accounts, will cause harm to the client.

Unethical Use of Contingent Fees

There are areas of the law in which contingent fee agreements are generally not acceptable. The restrictions are mostly for public policy and ethical reasons.
An attorney may not charge a contingent fee based on the amount of alimony awarded in a divorce case.  In Jordan v. Westerman, the parties agreed to a fee contingent on the alimony obtained from the client's husband.33  The agreement also stated that the attorneys would pay all costs associated with the divorce action.34  The Court struck down the agreement on legal as well as public policy concerns.35  The Court's concern was that a contingency agreement in a divorce action creates an economic incentive for the attorney to break up a marriage rather than encourage a possible reconciliation.36  The Court concluded that "every effort to effect a reconciliation was opposed and thwarted because it was for the interest of the solicitors under their contract that there should be no reconciliation."37  The Court viewed the actions of the attorneys in securing a fee contingent on alimony instrumental in their actions at avoiding settlement.38
The Supreme Court of Nebraska also disciplined an attorney for a contingent fee agreement in a divorce action.  The attorney represented the wife in a divorce action.  After the trial, he determined that the court awarded fees were inadequate.  He thereupon entered into a contingent fee agreement with his client.39  The agreement provided that the attorney's fee would be paid out of the property settlement, would not include any child support award, and would not be less than $1,000.40  The Court concluded that the attorney violated his ethical duty in attempting to contract for an amount more than he had originally agreed to.41  However, in this case, the Court did not find the same public policy concerns as the Court in Jordan.  The Court points out that there was no chance for reconciliation and that the attorney never tried to collect on the contract.42  The two cases also differ in that Jordan involved a client attempting to back out of an agreement, while the present case involved the state bar pressing for an ethical violation.  However, the State did succeed in its case, as the Court found that merely forming the new agreement was an ethical violation.43

Courts also disallow contingent fee agreements in criminal cases.  The case of Baca v. Padilla involved a private prosecutor, pursuing a conviction for a contingent  fee.44  The Supreme Court of New Mexico ruled this practice was against public policy.45  In general, the Court acknowledged that a contract for a contingent fee between a lawyer and a client is valid, as long as the amount is reasonable and fair.46  However, in a criminal case, a private prosecutor, working for a contingent fee, would have at least some economic incentive to attempt to convict the Defendant even if innocent.47  In a similar case, involving the use of a contingent fee for a commutation, the Supreme Court of Pennsylvania found the agreement against public policy, as well.48  In short, contingent fee agreements are generally not allowed in the context of a criminal case.

Nor are contingent fees is not allowed in representation before "legislative, executive, and administrative bodies or officials."49  Thus, while critics argue that the use of the contingent fee is out of control, there are contexts in which the fee is not accepted.

Ethical Considerations of the Contingent Fee

This paper will examine the ethics of the contingent fee in relation to the Model Code of Professional Responsibility, because of its remnants in cases and current ethical rules, as well as the more recent Model Rules of Professional Conduct.

Rule 1.5 of the American Bar Association's Model Rules of Professional Conduct states that "a lawyer's fee shall be reasonable."50  It allows contingent fees, but requires that the agreements be in writing, and include different percentages at different stages of the case.51  The Rule does not allow the use of contingent fees either in "domestic relations matter[s]" or as representation for a criminal defense.52

The Comment to the Rule expands on the Rule, stating, "when there is doubt whether a contingent fee is consistent with the client's best interest, the lawyer should offer the client alternative bases for the fee and explain their implications."53  Thus, while contingent fees are acceptable, the attorney should discuss other possible methods for payment with the client, giving her the option of not utilizing the contingent fee.

In addition to Rule 1.5, Rule 1.8 discusses costs.  Rule 1.8(e)(1) lists an exception for assisting a client financially.  It states that "a lawyer may advance court costs and expenses of litigation, the repayment of which may be contingent on the outcome of the matter."54  Thus, while courts have established that an attorney cannot pay the client's expenses, Rule 1.8(e)(1) suggests that the attorney can pay the costs, with repayment contingent on the result.  The attorney's right to recover costs then becomes just as contingent as his or her right to a fee.  Rule 1.8(e)(1) does not restrict the attorney from contracting around the Rule.  In addition, it allows the attorney to pay the costs outright.  Therefore, the Rules have expanded the reach of the contingent fee discussed in the earlier sections.

 Under DR 2-106(A) of the Model Code of Professional Responsibility, "a lawyer shall not enter into an agreement for, charge, or collect an illegal or clearly excessive fee."55  The Rule utilized an objective standard: "A fee is clearly excessive when, after a review of the facts, a lawyer of ordinary prudence would be left with a definite and firm conviction that the fee is in excess of a reasonable fee"56 and lists several factors to consider in the determination, including whether the fee is contingent.57

Additionally, Canon 13 states that a contingent fee "should be reasonable under all the circumstances of the case, including the risk and uncertainty of the compensation, but should always be subject to the supervision of the court, as to its reasonableness."58  While an attorney and her client are not restrained from entering a contractual relationship,59 this Canon suggests that the contract may be subject to judicial scrutiny.

Courts rarely evaluate a contingent fee agreement in a personal injury case.  As long as the agreement is fair and meets the requirements set forth in the above stated Rules, a court most likely will not challenge the agreement.  Attorney TV has never had a court interfere with a contingent fee agreement.60  Obviously, the contingent fee agreements of TV's firm have been such that they have not given rise to suspicion of the Court.  Thus, it is vital that an attorney who makes a contingent fee agreement examine the agreement with respect to the ethical Rules of his or her jurisdiction.

However, for one reason or another, some attorneys attempt to receive more from a contingent fee agreement than the client, or the state bar association, would find reasonable.  The Courts in the following cases deal with an attorney's professional responsibility instead of the issue of champerty, and many impose disciplinary measures on the violating attorney.

One case involved a charge by the State Bar of Arizona of an attorney charging a "clearly excessive fee" in violation of DR 2-106 discussed above.61  The attorney, Swartz, spoke with the client's mother and brother while the client was in the hospital, eventually instituted a conservatorship, and entered into a contingent fee agreement for the client's tort claim with the client's mother and brother for one-third of the recovery.62  The case was fairly straightforward, and because of an accompanying worker's compensation claim, some of the proceeds from the total settlement of $150,000, had to reimburse the workman's compensation Fund that paid some of client's expenses.63  The Court discussed that the tort case required little effort on Swartz's behalf; Swartz's did not even have to file a suit.64  In addition to retaining his one-third contingent fee, Swartz set aside an amount to be paid to the Fund, from which Swartz took a fifteen percent fee.65  The Court summed up the distribution by stating, "the net result of the settlement was that the Fund got $100,000, respondent [Swartz] received the $50,000 fee, and Sarge [client] received nothing."66  Reviewing the charges through DR 2-106, as well as Canon 13 discussed above, the Supreme Court of Arizona determined that Swartz's charged an excessive fee, and said, "if at the conclusion of a lawyer's services it appears that a fee, which seemed reasonable when agreed upon, has become excessive, the attorney may not stand upon the contract; he must reduce the fee."67  The Court went on to discuss that the fee originally set was excessive because of the amount of work performed by Swartz.68  While the case included many complicated issues, the Court's stand on excessive fees is clear: contingent fees are perfectly acceptable but are subject to judicial intervention, and charging excessive fees will result in disciplinary action.69

In another case, the Supreme Court of Iowa approved a contingent fee contract that set the attorney's recovery percentage at fifty percent.70  The case involved a class action of employees against an employer, and involved a claim that the employees originally believed would settle for millions of dollars.71  The parties reached a settlement in the amount of $65,000.72  The firm filed an application for attorney fees pursuant to the contingent fee agreement and the intervenor filed an objection, and the firm set forth an itemized list of time spent on the case, as well as expenses.73  Using a Disciplinary Rule from the Iowa Code of Professional Responsibility similar to DR 2-106, the Iowa Supreme Court held that the agreement was valid.74  The Court deferred to the District Court's findings in its ruling, including the fact that the employees had a difficult time finding an attorney to take the case, and that the case was about to dismissed when the firm accepted it.75 Therefore, the Court found the firm's openness, including informing the class that the fee agreement would be subject to court approval (due to the case being in bankruptcy court), the fifty percent fee was not excessive.76

Contingent Fee Agreements

Contingent fee agreements come in different forms.  To see the contingent fee agreement the interviewed attorney's firm uses, as well as the Iowa State Bar Association form, please see the appendix in the hard copy of this paper.  For an example from the California State Bar, see http://www.calbar.org/pub250/b/s0218-a.htm.

As seen through this paper, the contingent fee can result in high salaries for an attorney.  However, she must be constantly aware of the issues surrounding the fee, such as ethical implications as well as statutory requirements and state provisions where the attorney practices.  Representing clients on a contingent basis can be very fulfilling, especially in the fairy tale cases of representing the underdog against a multi million dollar corporation.  However, in reality, the use of the contingent fee will probably not constitute a large amount of income for a new attorney, as a recent study indicates that the financial return from contingent fee cases is not much different from an hourly rate.77

Future of the Contingent Fee: Influence of the Internet

The Internet has become an avenue for advertising legal services.  Many law offices advertise their contingent fee services on the Internet.  Some address the issue of the payment of fees and costs, while others boldly advertise "SUCCESS-OR NO FEE!"78  One firm's website explains contingent fees and the firm's use of the fee.79  Another firm advertises that its contingent fee percentage of 25% is the lowest in the country.80  Advertisements such as these may cause a client to be confused when he or she meets with an attorney to discuss a case, such as the one described in the example in the introduction.  Thus, with the ever-growing world of Internet advertising, the number of firms advertising their contingent fee will most likely continue to grow.

The contingent fee has had a long life, and has evolved through statutes and case law.  This development will continue into the future, with technology and the Internet already playing a large role.  Thousands of law firms advertise services on the Internet, including those associated with the contingent fee.  This advertising has both positive and negative effects.  First, because of the relative ease of Internet access, people are exposed to a variety of options for legal advice.  The availability may cause many attorneys to lower the percentage of his or her contingent fee due to the heavy competition.  However, this may not be good, either.  If an attorney lowers his or her percentage price drastically to compete, then the attorney will have to accept more and more cases on a contingent fee basis in order to maintain a steady caseload.  In the end, the attorney will end up having less time to devote to each individual client, resulting in inadequate representation.   Thus, maybe there is no solution.  But was there ever really a problem? 

1 Herbert M. Kritzer & J. Mitchell Pickerill, Contingent Fee Lawyers as Gatekeepers in the American Civil Justice System, 21 (Disputes Processing Research Program Working Paper DPRP 12-3, 1997).

2 West's Legal Thesaurus and Dictionary, 182 (1985).

3 See www.contingencylaw.com.

4 See Jeffrey O'Connell, Carlos M. Brown, and Michael D. Smith, Yellow Page Ads as Evidence of Widespread Overcharging by the Plaintiffs' Personal Injury Bar - and a Proposed Solution, 6 Conn. Ins. L.J. 423 (2000).

5 Brickman, Lester, Contingent Fees Without Contingencies: Hamlet Without the Price of Denmark? 37 UCLA L. Rev. 29, 43 (1989).

6 West's Legal Thesaurus and Dictionary, 125 (1985).

7 Peck v. Heurich, 167 U.S. 624, 631 (1897).

8 Id. at 631-632, quoting 6 App. D.C. 283, 284.

9 Id. at 632, quoting 6 Ap. D.C. 283, 284.

10 Northwestern S.S. Co., Limited v. Cochran, 191 F. 146, 151 (9th Cir. 1911).

11 Id. at 152.

12 Mitchell v. Bell, 1 N.C. 244, 246 (1800).

13 F.B. MacKinnon, Contingent Fees for Legal Services, 33 (1964).

14 Portions of the Model Rules for Professional Conduct have been enacted in the majority of jurisdictions, and are more recent than the Model Code.  However, for purposes of this paper, I have incorporated both into my discussion of ethics.  ABA Compendium of Professional Responsibility Rules and Standards, 8 (1999).

15 Id. at 39.

16 Kritzer, Herbert M., The Wages of Risk: The Returns of Contingency Fee Legal Practice, 47 DePaul L. Rev. 267, 269 (1998).

17 E-mail from Attorney TV to Molly V. Joly (October 16, 2000).

18 Id.

19 Id.

20 Id.

21 Id.

22 Id.  See example of an attorney letter in appendix.

23 E-mail from Attorney TV to Molly V. Joly (October 16, 2000).

24 E-mail from Attorney TV to Molly V. Joly (October 17, 2000).

25 Here, "costs" refers to court costs as well as processor server costs.

26 Id.

27 See www.atlanet.org.

28 Id.

29 Id.

30 Julius Cohen, The Law: Business or Profession? 209 (1924).

31 Id. at 210.

32 Id. at 239.

33 Jordan v. Westerman, 28 N.W. 826, 173-174 (Mich. 1886).  Although at trial, the Plaintiff (wife) denied having agreed to the terms of the agreement.

34 Id.

35 Id. at 179.

36 Id. at 180.

37 Id.

38 Id. at 174.  While the case was pending, the husband's attorney attempted to locate the wife to discuss the divorce action, however, the wife's attorney would not release the information.

39 State of Nebraska Ex Rel. Nebraska State Bar Ass'n., v. Dunker, 71 N.W.2d 502, 504 (Neb. 1955).

40 Id.

41 Id. at 506.

42 Id.

43 Id.

44 See Baca v. Padilla, 190 P. 730, (N.M. 1920).

45 Id. at 731.

46 Id.

47 Id.

48 See Peyton v. Margiotti, 156 A.2d 865, (Pa. 1959).

49 F.B. MacKinnon, Contingent Fees for Legal Services, 49 (1964).

50 Model Rules of Professional Conduct, Rule 1.5 (1987).

51 Id.

52 Id.

53 Model Rules of Professional Conduct, Rule 1.5 cmt. (1887).

54 Id.

55 Model Code of Professional Responsibility DR 2-106 (1981).

56 Id.

57 Id.

58 Id. at 383.

59 MacKinnon, 22.

60 E-mail from Attorney TV to Molly V. Joly (October 16, 2000).

61 In the Matter of Swartz, 686 P.2d 1236, 1238 (Ariz. 1984).

62 Id. at 1239.

63 Id. at 1240.

64 Id. at 1239.

65 Id. at 1240.

66 Id.

67 Id. at 1243.

68 Id.

69 See In the Matter of Swartz, 686 P.2d 1236 (Ariz. 1984).

70 See King v. Armstrong, 518 N.W.2d 336 (Iowa 1994).

71 Id. at 337.

72 Id.

73 Id.

74 Id. at 338.

75 Id.

76 Id. at 337.

77 Kritzer, Herbert M., The Wages of Risk: The Returns of Contingency Fee Legal Practice, 47 DePaul L. Rev. 267, 302 (1998).

78 www.sierra-fc.com/Success.htm

79 See www.contingencylaw.com

80 See www.freeattorney.com

Friday, November 24, 2000

Mr. Debtor
Address
Anytown, USA

Re: Your Account with the Creditor

Dear Mr. Debtor:

 This law firm represents the above named Creditor concerning your past due account, as of the date above, in the amount of $0.00 Please regard this letter as a legal demand that the amount listed above be paid immediately. Your check should be made payable to this law office and sent to the address indicated on this letterhead.

 If you want to resolve this matter without a lawsuit, you must, within one week of the date of this letter, either pay the balance that you owe or call this office and work out arrangements for payment with it.  If you do neither of these things, this office will be entitled to file a lawsuit against you, for the collection of this debt, when the week is over.  Federal law gives you thirty days to dispute the validity of the debt or any part of it.  If you do not dispute it within that period, we will assume that it is valid.  If you do dispute it - by notifying this office in writing to that effect - this office will, as required by law, obtain and mail to you proof of the debt.  And if, within the same period, you request in writing the name and address of your original creditor, if the original creditor is different from the current creditor, we will furnish you with that information, too.

 
 The law does not require us to wait until the end of the thirty-day period before suing you to collect this debt.  If, however, you request proof of the debt or the name and address of the original creditor within the thirty-day period that begins with your receipt of this letter, the law requires us to suspend our efforts (through litigation or otherwise) to collect the debt until we mail the requested information to you.  This is an attempt to collect a debt and any information obtained will be used for that purpose.

Very truly yours,
 
 

Thomas A. Vaskulskas

TAV/kh