Contingency Fees Are the Best Way to Prevent "Frivolous Lawsuits"

Posted by Diego MadrigalJune 18, 2008 5:01 PM

One of the big myths about trial lawyers is that they are the reason for the existence of "frivolous lawsuits." In reality, most economic studies show that trial lawyers, because of their fee structures, actually reduce the number of frivolous lawsuits. This makes sense if you think about it since most trial lawyers work on a contingency-fee basis. Lawyers working on contingency only get a fee if their client is awarded money. Therefore, they are less likely to take cases in which there will be no recovery, like a case where a jury would find for the defendant. Economists argue that the contingency fees act as screeners, and most lawyers will drop a case they believe is without merit before even bringing a lawsuit. What this means is that trial lawyers REDUCE the number of frivolous lawsuits! Furthermore, contingency fee lawyers tend to work more efficiently and resolve claims much faster than their hourly-billing counterparts. Like most good economists, the researchers do not just rely on intuition, they have statistics:

In states that restrict contingent fees, plaintiffs dropped 18% of cases before trial without getting a settlement. In states where lawyers were free to take their usual 33% cut, they dropped only 5% of cases. This tells us that lawyers had already screened out the junk suits and were pursuing those with merit.

Our study also shows that the time to settlement in medical malpractice cases is 22% longer in states that restrict contingent fees. In Florida, in the 300 days after contingent fees were restricted in 1985, settlement time increased by 13%. Why? When lawyers are paid by the hour, they have little incentive to settle quickly.

This does not even take into account the access to the courts that is available to everyone because of the existence of the contingency fee system. If lawyers had to be paid hourly, then it is likely that many people would not be able to afford it and could not seek justice by taking a dispute before a jury of their peers via a trial.

Most everyone would agree that reducing the amount of frivolous lawsuits is a good thing. It just so happens that we do not need tort reform to accomplish this, since we have been filtering cases for a long time. In fact, a good book to read, which is available in full at this link by the American Enterprise Institute, a conservative think tank, actually asks the question if contingency fees are tort reform by proxy.

The description of the book is also interesting:

If America is a “lawsuit hell,” then contingent-fee lawyers are often considered its devils. Contingent fees have been called unwarranted and the lawyers who accept them have been denounced as unethical and uncivilized. Furthermore, in the midst of increased filings and escalating awards, it is difficult not to notice that some plaintiffs’ lawyers have become very rich. As a result, tort reformers have called for limits on contingent fees and many states have obliged. But limits have been enacted without any evidence that contingent fees were either responsible for the liability crisis or that limiting them would produce benefits.

This study, one of the first empirical examinations of contingent-fee limits, finds that contingent fees benefit plaintiffs and do not cause higher awards. Furthermore, contingent-fee limits are unlikely to reduce lawyers’ income very much, since they will simply switch to hourly fees. Since hourly fee lawyers are willing to take more cases to court than contingent-fee lawyers, contingent-fee limits can increase the number of low-value “junk suits.”

Tort reform is an important goal, but limiting the contractual rights of plaintiffs and their lawyers is an unattractive and likely ineffective method of achieving that goal.

Perhaps the most conservative of the critics are realizing that the data does not support the misinformation that is out there about trial lawyers. Hopefully through projects such as this one, read mostly by people who have been brainwashed to be against trial lawyers, the public can become better informed and realize that they have been fed lies by special interest groups with ulterior motives.