Monday, November 25, 2013

Contingency by the Hour?

When I was studying to be a lawyer I remember attorneys in my hometown of Marquette telling me how the adoption of the no-fault system in Michigan took a lot of work away from lawyers.  Almost two years ago I move back to Michigan from Wisconsin, and after working in both states, I can see exactly what they mean. I see the Wisconsin legal market today as similar in many respects to what I think the Michigan legal market was like in the past before the no-fault system was adopted.  Car accidents are big business for lawyers in Wisconsin and almost everybody tries to get in on the action, whereas in Michigan, personal injury matters stemming from car accidents is a much more specialized practice area. Why? Money.

The no-fault system in Michigan makes it harder to successfully bring a claim for damages compared to the common law negligence actions that existed before adoption of the no-fault system.  There are actions to be had in Michigan, just not as many of them.  This affects all lawyers because if there are less personal injury cases then less personal injury plaintiff’s attorneys are necessary, less personal injury defendant’s attorneys are necessary, and these displaced lawyers move into other practice areas.  I am not saying that is a bad thing, I am just noting what happens.   

In Wisconsin, it is quite the opposite. Note the advertisement on the back of your phone book, watch late night TV commercials, and look at the billboards along every major freeway.  Personal injury lawyers advertise seemingly more than any other kind of attorney in Wisconsin.  This kind of advertising is expensive, but yet there are always lawyers willing to shell out the money for these ads.  The reason is simply, you can make a lot of money on one single case.

Most personal injury lawyers—nearly all of them—take their cases on a contingency basis meaning their fee is taken as a percentage of the money recovered, typically between 20% to 40%.  For example, lets say a lawyer spends 100 hours working on a case, it settles for $300,000.00, and the lawyer charges a 1/3 contingency fee.  The client gets $200,000.00 and the lawyer gets $100,000.00.  Compare that to the billable hour and you can see why these cases are so attractive.  A lawyer would have to bill 500 hours at $200.00 per hour to make $100,000.00.  A few cases like that in a year and a lawyer is making a pretty nice living without having to work too many hours.  And what happens if they get that case that settles for millions?

Now, before the personal injury lawyers start jumping up and down and screaming at me, I should point out that that is not really the way it works.  That is the perception, but that is not the way it works.  Lawyers that focus on personal injury have to pay for that expensive advertising, they have to spend significant amounts of time weeding through potential clients, and they don’t win or make large returns on every case.  So they often end up making an income similar to attorneys in other practice areas.

In Wisconsin, it’s not just the lawyers that I would call personal injury lawyers who take personal injury cases.  Most Wisconsin firms have someone who claims personal injury as one of their practice areas.  Litigation is the focus of my practice.  If I was at a similar firm in Wisconsin, then I am sure that I would advertise personal injury as one of my practice areas.  I have worked on personal injury cases, but I don’t advertise that because I mostly handle real estate disputes, commercial litigation, and trust and estate proceedings.  In prior positions, I focused on environmental and construction litigation.  In essence, I mostly serve business clients.  Although, to some extent litigation is litigation and I have some experience with personal injury matters, so there is no real reason I could not take more personal injury type matters and hold myself out as a personal injury lawyer.  However, the incentives in Michigan are different than they are in Wisconsin. 

In Michigan, I don’t look to highlight the personal injury matters I have worked on because my business clients are more likely to see that as a negative.  They often view all personal injury attorneys as the ambulance chasing caricatures they see on TV.  Since business clients are my targets, I would rather avoid that stereotype.  Litigators similar to me in Wisconsin, however, often risk that perception because the allure of the big case is too great to resist.  They end up with personal injury listed in their practice areas on their websites and phone book ads, but they don’t have to put in the advertising dollars that the lawyers who work exclusively in personal injury do because it is not their sole practice area.   For these lawyers, one big case or a few sizable car accident cases can payoff handsomely.

The economist in me finds the whole pricing method for personal injury cases annoying.  All that expensive advertising seems like a waste.  If lawyers made less money—less revenue (not necessarily profit)—on the personal injury matters, then there would be less lawyers working in the personal injury area and more clients to go around for the lawyers still working in that area.  The problem, as I see it, is the contingency fee.

I understand that contingency fees are offered because your average Joe, who gets into a car accident, does not have the $20,000.00 or more necessary to pay an attorney to work 100 hours or more to handle a litigated personal injury matter for them.  But who says contingency fees have to be based on percentages?  Couldn’t an attorney take a personal injury case on contingency fee basis where he still also charges by the hour? 

The fees would have to be capped at a certain percentage of the total recovery to comply with certain ethical requirements.  Lawyers could keep track of their time on personal injury matters just like they do on other matters, but they could also wait to bill the client until the end of the case.  They could even charge an increased hourly rate to account for the risk and inconvenience of being paid only at the end of the case.
Using our example above, 100 hours on a case that settles for $300,000.00, the lawyer could charge $300.00 per hour and make $30,000.00.  The client would pay $70,000.00 less for the attorney then under the typical 1/3 arrangement.  Now I understand why the lawyers who spend all that money on advertising would not and could not agree to take cases in this manner.  But general civil litigation attorneys who do not spend a lot of money on advertising could take cases in this manner.  Further, you would think that if the word got around that an attorney was charging fees this much lower than his competition, then the lawyer would attract even more clients.  Moreover, the lawyer is better off taking these cases than his other cases because we are assuming he is taking them at an increased fee compared to his normal rate.  This fee arrangement would only work on large matters where the damages are well in excess of $100,000.00 because the hourly fees on smaller matters would likely quickly hit the cap and be equivalent to the traditional percentage arrangement.  

I posed this idea to a colleague and his response was that personal injury clients are low information consumers meaning they don’t care about price or even realize the potential savings that could be had.  He also told me a story about how one of his law professors was looking for a personal injury lawyer in another state to help a family member who had a good claim where there was clear liability and deep pockets to pay that liability.  No matter how many phone calls the professor made he could not find a lawyer that would take the case by the hour.  If a law professor couldn’t find someone to take a case in that manner what hope does anyone else have?  His point was that the contingency fee system is simply too ingrained in the system to change it now.  I, of course, debated each point.  I argued that even if he was correct that most personal injury clients don’t shop based on prices, there has got to be some personal injury clients that do.  Further, it only takes a few lawyers operating under a system as I have proposed to start to change the system overall.

This gave me an idea for an experiment.  I live and work in Marquette, Michigan.  I am about a three and half hour drive from Green Bay, and about a five and half hour drive to Milwaukee or Madison.  The distances are not ideal for me to take car accident cases in Wisconsin, but for the right case, I may take one, and I may take one on a contingency fee by the hour as I have described in this blog.  If someone finds me on the Internet because of this blog and gives me a call for an initial consultation, then maybe I will have proved to my colleague that not all personal injury clients are low information consumers… or maybe I am just wasting time, solving the world’s problems, drinking too much coffee, and avoiding real work that needs to be done.    


© November 2013 Brandon J. Evans