Two Cheers for Contingent Fees

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. The AEI's Liability Studies examine aspects of the U.S. civil liability system central to the political debates over liability reform. The goal of the series is to contribute new empirical evidence and promising reform ideas that are commensurate to the seriousness of America's liability problems. Alexander Tabarrok is an associate professor of economics at George Mason University and director of research for the Independent Institute. Eric Helland is an associate professor of economics at Claremont McKenna College, a senior economist at the RAND Corporation's Institute for Civil Justice, and a member of the plenary faculty at the Claremont Graduate School.