HKLII

Hong Kong Law Reform Commission

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Chapter 2

 

Contingency fee arrangements in the USA

 

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Introduction

 

2.1                   No jurisdiction other than those in the United States operates an extensive contingency fee system,[1] and the extent of the contingency fee’s use there is unmatched by any other country.[2]  The longstanding and general acceptance of contingency fees can be dated back to 1850 when the Supreme Court recognised the validity of contingency fee contracts.  There are, however, differences among the 50 states in the operation and control of the contingency fee schemes.

 

2.2                   According to the Green Paper prepared by the UK Lord Chancellor’s Department in 1989, the State of Maine, for example, prohibits contingency fees entirely, whereas in New York, Michigan and Delaware, statute has overruled initial restrictions against contingency fees.[3]  Contingency fees are not prohibited in New Jersey, Alabama, Ohio and California, but they are subject to limitations and controls.  In another study[4] in 1992, it was stated that all 50 states allow contingency fee arrangements.

 

2.3                   What is not disputed is that contingency fees are the primary financing arrangements in personal injury and other tort litigation.  Contingency fees are used most frequently in personal injury cases where the potential awards are greatest.  One source noted that 95% of personal injury plaintiffs utilise contingent fee arrangements.[5]  Some lawyers may also be willing to charge on a contingency basis for debt recovery, workmen’s compensation, corporate business practice, taxation, land compensation and contested will.[6]  However, the use of contingency fees is proscribed in certain areas on the grounds of public policy.  It is noted that the Disciplinary Rules of the Code of Professional Responsibility (CPR) prohibit the use of contingency fee arrangements in criminal matters, and that the Ethical Considerations of the CPR advise that contingency fees are not appropriate for domestic or matrimonial cases.[7]

 

 

The percentage contingency fee

 

2.4                   Although various methods and formulae are adopted in different states to fix the contingency fee, the most common basis for charging contingency fees in the USA is as a percentage of the sum recovered.[8]  There are variations, however, even within the percentage contingency fee schemes.  The lawyer and his client may agree to apply a fixed percentage rate to the whole sum recovered.  Alternatively, they may agree a changing percentage rate as the amount recovered increases, depending on the additional skill and effort required.  Parties may also agree a series of increasing percentage rates applied to the recovery, depending on the stage reached in the proceedings.[9]

 

2.5                   The United States contingent fee system has been described as “extraordinary” in nature.[10]  The United States is the only country which allows a lawyer to receive a percentage of an award or settlement as a fee.  A typical contingent fee arrangement may provide that the attorney’s fee will constitute 25% of the amount recovered if the case settles, or 30% if the case proceeds to trial.  As an example of excessive fees which go beyond adequate compensation for the lawyers’ services and risks, Aranson cites the case of Pennzoil v Texaco[11] which resulted in a $10 billion award for Pennzoil, and $2 billion for their lawyers.

 

2.6                   Understandably, the contingency fee system has come under criticism and initiatives proposing a ceiling on contingency fees in tort actions have been launched.  Birnholz[12] noted that in response to the perceived crisis concerning the affordability of health care services throughout the United States, many state legislatures have enacted comprehensive statutory schemes designed to lower medical malpractice insurance premiums and regulate malpractices in litigation.  An example of such a scheme is the Medical Injury Compensation Reform Act in California.  Typically, these schemes contain provisions that limit the amount an attorney can charge on a contingency fee basis in actions against health care providers.  At the time of the article, New Jersey allowed fees amounting to 33% of the first $250,000 recovered, 25% of the next $250,000, and 20% of the next $500,000.  The fees allowed in California were 25% of amounts recovered between $100,000 and $500,000, and 15% of amounts above $600,000.

 

2.7                   Critics of the US contingency fee system have described it as nothing more than a “lottery ticket” that brings the “jury system into contempt” and creates a “feeling of antagonism between aggregated capital on the one side and the community in general on the other …”[13].  Aranson[14] is one such critic of the American percentage contingent fee system.  He believes that under a percentage contingent fee, lawyers are more likely to choose to represent clients with frivolous claims, to pursue cases with their own interests in mind rather than their clients’ (conflict of interest), and to charge excessive fees:

 

Ø  Frivolous litigation – Lawyers can afford to file groundless cases by using the substantial funds gained from successful contingent cases to front the litigation costs.  Hence, lawyers can gamble that a baseless claim will be profitable because of the pressure on the defendant to settle.  Cases are therefore taken on for their settlement value, not their merits.  In one Agent Orange case,[15] although the judge remarked, “I’m not going to reward lawyers for bringing a case … with no factual connection … between the disease and the alleged cause.  I do not believe it desirable to encourage cases like this”, the chemical companies settled out of fear of a jury verdict that might run to billions of dollars.  The plaintiffs’ lawyers in this case asked for 14% (less than the standard one third) of the $180 million settlement, amounting to a legal fee of $26 million.  This aspect of the contingent fee system in the US stems from other unique features of the American civil litigation system which are examined later in this chapter.

 

Ø  Conflict of interest – Whilst the contingency or conditional fee system in general may align the lawyer’s and the client’s interest because both want to seek the highest recovery possible, a conflict arises if the lawyer wants the highest recovery in the shortest time possible.  It should be noted that the vast majority of cases engaged on a contingent fee basis settle.  By settling a case quickly, a lawyer can receive a large fee without expending much time on the case.[16]

 

Ø  Excessive fees – Critics believe that the fees charged by contingency fee lawyers are excessive and not justified.  Contingency fee lawyers often defend their fees by saying they risk losing the case and receiving no payment at all.  Yet the high contingent fee does not reflect the actual risk of loss.  Over 90% of cases taken on a contingent fee basis settle before trial, and only 50% of those that go to trial result in an adverse verdict.  Therefore, on average, the attorney risks losing in only 5% of cases.

 

 

Other unique features of the American civil justice system

 

2.8                   In order to ascertain whether the high level of litigation and awards in the United States civil justice system are the product of contingency fees alone, or other factors, it is necessary to examine other features of the American civil justice system.

 

 

Costs do not follow the event

 

2.9                   The basic cost allocation rule in most jurisdictions is that the losing litigant must pay not only his or her own costs, but also those of the winner, or at least part of the winner’s costs.  We have pointed out[17] that this costs indemnity rule is adopted for civil proceedings in Canada, Japan, Hong Kong, the United Kingdom and most European jurisdictions, including Austria, Belgium, Denmark, France, Norway, Spain, Sweden and Zurich.[18]

 

2.10                One obvious difference between the United States and these other jurisdictions is that, in the United States, each party to the proceedings bears his or her own costs, and does not have to pay the other party’s legal costs, except where the litigation is vexatious or an abuse of process.  This rule, coupled with the availability of contingency fees, means that it costs the plaintiff almost nothing to bring a civil claim.

 

 

Trial by jury

 

2.11                 In the United States, the right to jury trial in a civil case is constitutionally protected.  It is a unique feature of the American civil justice system that a plaintiff is entitled to a jury trial in almost any case involving personal injuries.  The jury decides not only the issue of liability, but also that of damages.  Since juries generally have no technical training or prior litigation experience, they may be subject to influence by attorneys in ways that judges are not.[19]

 

 

Punitive damages

 

2.12                Punitive damages are also within the jury’s discretion in many states, and the readiness of American courts and juries to award punitive damages is another reason for the high awards in the United States.[20]  The problem has been compounded by the extensive publicity given to the initial awards and the relative under-reporting of those cases where the quantum has been reduced on appeal.  This would tend to affect jury sensibilities and fuel the expectations of would-be claimants and their lawyers.[21]

 

 

Specialised plaintiff bar

 

2.13                There is a division between lawyers who specialise in acting for plaintiffs on a contingency fee basis and defence lawyers who charge hourly rates.[22]  The lucrative nature of the contingency fee system for the more aggressive specialist plaintiffs’ bar encourages the filing of speculative actions.[23]

 

 

Precedents not binding

 

2.14                The American courts openly embrace a high level of judicial law-making and a flexible approach to precedents.[24]  To American judges, predictability and certainty in the law seem to count for less than perceived justice in the individual case.[25]

 

 

Discovery

 

2.15                In the United States, pursuant to Rule 26(b)(1) of the Federal Rules of Civil Procedure,[26] subject to some limitations, parties may obtain discovery regarding any matter, not privileged, that is relevant to the claim or defence of any party, including the existence, description, nature, custody, condition, and location of any books, documents, or other tangible things and the identity and location of persons having knowledge of any discoverable matter.  For good cause, the court may order discovery of any matter relevant to the subject matter involved in the action.  Relevant information need not be admissible at the trial if the discovery appears reasonably calculated to lead to the discovery of admissible evidence.  This approach opens the door to “fishing expeditions” to uncover new avenues of liability.  It has been commented that the American process of discovery is such that it is possible for an action to be commenced without any substantive evidence, and the process of discovery can be used to find both evidence and defendant.[27]

 

2.16                In Hong Kong, by contrast, the extent of the right of discovery is more restrictive, especially in respect of discovery against those who are not parties to the proceedings.  By virtue of Order 24 rule 7A of the Rules of the High Court (Cap 4A), which applies only to personal injury cases, the application has to be supported by an affidavit which must specify or describe the documents in relation to which the order is sought and show that the documents are relevant to an issue arising in the proceedings.  Discovery of documents or facts against non-parties is not normally available.[28]

 

 

Absence of legal aid

 

2.17                The extensive legal aid system for civil claims available in many jurisdictions is not available in the United States.  In the absence of such a system, mechanisms such as contingency fees and costs not following the event facilitate access to justice.

 

 

Class actions

 

2.18                The United States’ civil procedure caters for class actions which allow a large group of plaintiffs to pursue a common claim against one or more defendants.  Class actions are distinct from typical joinder situations in both the number of litigants involved and in the manner in which most class members participate in the case.[29]  Rule 23 of the Federal Rules of Civil Procedure contemplates that the class of litigants will be represented both by counsel and by “class representatives” (ie active members of the class who make many decisions for the entire class).[30]

 

2.19                The requirements of a class action are set out in Rule 23(a):

 

“One or more members of a class may sue or be sued as representative parties on behalf of all only if (1) the class is so numerous that joinder of all members is impracticable, (2) there are questions of law or fact common to the class, (3) the claims or defenses of the representative parties are typical of the claims or defenses of the class, and (4) the representative parties will fairly and adequately protect the interests of the class.”

 

 

Non-specific pleadings

 

2.20                Rule 8 of the Federal Rules of Civil Procedure requires that a pleading which sets forth a claim for relief shall contain (1) a short and plain statement of the grounds upon which the court’s jurisdiction depends, (2) a short and plain statement of claim showing that the pleader is entitled to relief, and (3) a demand for judgment for the relief the pleader seeks.

 

2.21                In Hong Kong, by contrast, pleadings have to be specific.  Order 18 rule 12 of the Rules of the High Court (Cap 4A) requires that every pleading must contain the necessary particulars of any claim, defence or other matter pleaded.[31]

 

 

Conclusion

 

2.22                It seems, therefore, that the way in which contingency fees operate in the American civil litigation system flows from the interplay of a number of factors.  What may be considered to be the undesirable elements of the US system, such as the high level of litigation and the extreme level of awards, go wider than contingency fees and have their roots in some fundamental features of the US civil justice system.  It is not possible, for instance, to attribute the high level of litigation to contingency fees or any one factor alone.  In fact, when Aranson criticised the American percentage contingency fee system,[32] he made it clear that he believed “some form of contingency fee system is essential to facilitate access to the justice system in the United States.”  He found England’s conditional fee system an attractive model which could maintain the present advantages and mitigate the disadvantages of the percentage contingency fee system.  The next two chapters will examine the development of conditional fees in England and the problems encountered.

 


[1]              UK Lord Chancellor’s Department, Contingency Fees (1989 : Cm 571), para 2.13.

[2]            Aranson, “The United States Percentage Contingent Fee System : Ridicule and Reform From an International Perspective” (1992) 27 Texas International Law Journal 755.

[3]              UK Lord Chancellor’s Department, cited above, para 2.8.

[4]              Aranson, cited above.

[5]              J Kakalik & N Pace, Costs and Compensation Paid in Tort Litigation (1986) quoted at footnote 12 by R M Birnholz, “The Validity and Propriety of Contingent Fee Controls” (1990) 37 UCLA Law Review 949.

[6]              UK Lord Chancellor’s Department, cited above, para 2.9.

[7]              As above, para 2.10.

[8]              As above, para 2.12.

[9]              As above.

[10]            Aranson, cited above.

[11]            729 S.W. 2d 768 (Tex. App. – Houston [1st Dist.] 1987).

[12]            Birnholz, cited above.

[13]            “The Contingent Fee Business”, 24 Alberta Law Journal 24, 26 (1881), quoted in Aranson, cited above.

[14]            Aranson, cited above.

[15]            In Re Agent Orange Product Liability, 100 FRD 718 (EDNY 1983).

[16]            Aranson gave the following example: “A lawyer may decide that the true worth of a claim is $100,000 which will require 100 hours of work to obtain.  The lawyer will receive one-third of the award as a fee, $33,000.  After 5 hours of work, the insurance company offers $15,000 to settle, the lawyer receiving one-third, $5,000.  The lawyer who accepts the settlement will receive a fee of $1,000 an hour, as opposed to $330 an hour if the case goes to trial.”

[17]            See para 1.9 above.

[18]            See Australian Law Reform Commission, Costs shifting – who pays for litigation (1995, Report No 75), at Appendix C.

[19]            D Debusschere & J L Hom, “United States” in D Campbell (ed), International Product Liability (1993), at 564.  HKLRC, Report on Civil Liability for Unsafe Products (1998), para 6.10.

[20]            Ontario Law Reform Commission, Report on Products Liability (1979), at 75.  HKLRC, cited above.

[21]            Stapleton, Product Liability (1993), at 78.  HKLRC, cited above.

[22]            Australian Law Reform Commission, Product Liability (1989, Report No 51), at 10.  HKLRC, cited above.

[23]            HKLRC, cited above.

[24]            Stapleton, cited above, at 75 and 79.  HKLRC, cited above.

[25]            As above, at 71.  HKLRC, cited above.

[26]            Including amendments effective 1 December 2000.

[27]            Australian Law Reform Commission, cited above, at 10.  HKLRC, cited above.

[28]            W S Clarke, Hong Kong Civil Court Practice (2000, Butterworths), at 175.

[29]            Baicker-McKee, Federal Rules of Civil Procedure (2001, West Group), at 386.

[30]            As above.

[31]            See also Aktieselskabet Dansk Skibsfinansiering v Wheelock Marden [1994] 2 HKC 264 (CA), at 269E-270E, per Bokhary JA, which set out the general requirement of pleadings.

[32]            See para 2.7 above.