Controlling Attorneys' Fees

Typically, plaintiffs’ attorneys in tort cases charge their clients “contingent” fees that are based on a percentage of any damages ultimately received from the defendants. Like nonpecuniary damages, those fees could be constrained by law. The Congress has considered various proposals that would cap such fees in specific contexts.⁷

In an ideal world without errors and information costs, attorneys would pursue only meritorious claims; thus, from the standpoint of efficiency, restricting their incentive to do so by limiting the fees they could charge would be unambiguously negative.⁸ Proponents of such caps argue that in practice, however, the costs of inhibiting some legitimate claims would be outweighed by the benefits of reducing the number of “nuisance suits” (such as those filed solely to extract settlements from defendants who would face high litigation costs).⁹ From the standpoint of equity, capping contingent fees would help some victims by letting them keep a larger share of the damages they collected, but it could hurt other victims by reducing their access to legal representation.

Some more-targeted versions of this approach could lessen the negative effects. Under one variant—called the “early offers” proposal—a plaintiff’s attorney who charged contingent fees would be required to send claim notices in all personal injury cases; his or her fees would be capped only if the defendant made an offer within a specified time after receiving the claim notice and the plaintiff accepted the offer.¹⁰ Because that variant would cap fees only in cases for which the plaintiff’s attorney had done relatively little work, it would be likely to reduce any adverse effect on the ability of injury victims to find legal representation. Still, limiting attorneys’ fees in those cases could make it harder for attorneys to take chances on meritorious but difficult cases that might ultimately yield them no income.

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7. For example, the HEALTH Act of 2003 would allow plaintiffs’ attorneys in medical malpractice cases to collect no more than 40 percent of the first $50,000 recovered in a case by all plaintiffs, 33 percent of the next $50,000, 25 percent of the next $500,000, and 15 percent of any amount above $600,000.

8. In that textbook world, the ideal approach would be to allow attorneys to buy claims from the plaintiffs for agreed-upon amounts and collect 100 percent of any settlement or judgment, since that would give them the incentive to pursue cases to the efficient extent. But under current law, such complete transfer of a claim from plaintiff to attorney (known as “champerty”) is illegal. See Robert D. Cooter, “Economic Theories of Legal Liability,” Journal of Economic Perspectives, vol. 5, no. 3 (Summer 1991), p. 20.

9. Versions of this approach that would limit contingent fees for court judgments but not for voluntary settlements would have the additional effect of giving plaintiffs’ attorneys more incentive to settle. Again, that effect is clearly inefficient in a simple textbook world, but it may improve efficiency if other factors currently bias attorneys against settlement and toward trial.

10. The capped fees would increase plaintiffs’ incentives to accept early offers and thus defendants’ incentives to make them.

Last reviewed October 2024