CLAREMONT, Calif. (Legal Newsline) - A trove of data revealing the contingency fees charged by New York City lawyers suggests that in virtually every tort case, lawyers charge the full one-third allowed under state regulations.
Researchers at Claremont McKenna College and the USC Gould School of Law obtained retainer and closing statements for nearly 300,000 cases filed in New York’s First Judicial Department from 2004 to 2013. The data revealed the unsurprising fact that most lawsuits end in settlement – not the 95 percent assumed under conventional wisdom, but at least 85 percent of the cases studied were settled without going to trial.
And most cases settle for a relative pittance, compared with high-stakes corporate litigation. Three-quarters of settlements were for less than $40,000.
A random sample of 100 of those statements uncovered a more unusual trend, however. In only three of those 100 cases did lawyers charge less than the 33.3 percent maximum for contingency fees in New York.
The finding suggests that while lawyers spend millions of dollars advertising their services on TV and in subway cars, they almost never compete for clients by lowering their fees, puzzling given the supposed glut of law-school graduates trying to earn a living in New York.
Another finding could provide some insight: Plaintiffs tend to be concentrated in low-income ZIP codes, where they may not have the sophistication or financial wherewithal to negotiate aggressively with personal injury lawyers over fees.
The paper, “Contingent Fee Litigation in New York City,” was written by Eric Helland, an economist at Claremont McKenna; Daniel M. Klerman, a professor at USC Gould; and Brenda Dowling of USC Gould and Alexander Kappner, an independent researcher. The team took advantage of a nearly unique rule in New York requiring plaintiff lawyers to file a statement with the court whenever they resolve a case for a client, revealing the retainer agreement and the fees and expenses they charged.
The rule dates back to the 1920s when New York judicial authorities grew concerned about the problem of “ambulance chasers” who charged exorbitant contingency fees in accident cases. The First Department initially required lawyers to send their clients a full accounting of costs and fees, but changed the rule to require a filing with the court after a 1955 investigation found that 60% of the lawyers were charging 50% contingency fees.
In 1957, the First Department enacted a 33.3 percent cap on most contingency fees.
The researchers were able to obtain PDFs of some 293,000 retainer and closing statements and spreadsheets detailing financial outcomes but not the fees and expenses lawyers charged. So they hand-examined a random collection of the PDFs for fees and discovered a remarkable consistency: Only five files had fees that deviated from the First Department maximum, three under and two over (probably by court-approved agreement with the client).
Klerman, the Edward G. Lewis Chair in Law and History at USC Gould, attributed the consistency in fees to New York’s court-enforced cap, which he said is below the 40 percent or so lawyers in other jurisdictions typically charge in personal injury cases.
“It’s like asking why gas stations didn’t compete based on price in the early 1970s when there were wage and price controls, or why owners of rent-controlled apartments don’t compete by lowering rents,” Klerman said in an emailed comment. “When prices are capped at an artificially low level, suppliers don’t compete (or compete only on quality, not on price).”
There isn’t an equivalent scarcity of lawyers willing to handle personal injury cases as with apartments in New York or gasoline during the Energy Crisis, of course. And there are other examples of lawyers engaging in behavior that could restrict competition on fees.
Class action attorneys frequently share their fees with rival firms in a system some have criticized as eliminating the incentive to offer lower prices. Like the low-income clients in the New York study, the “clients” in class actions tend to have little bargaining power against their lawyers. Most, in fact, have no idea they are involved in a lawsuit at all.
The study also revealed remarkable consistency in results achieved by plaintiffs. Only 1.3 percent of the cases studied actually went to trial, but those that did achieved an average award of $92,534, only slightly higher than the $89,168 average settlement.
Even at the extremes, trial plaintiffs did not do hugely better than those who settled: At the 99th percentile the average trial award was $2 million, versus $1.3 million for settlements. Among cases that won anything at all, the average payout was much higher at $315,000. But even among the winners, the median was only $30,000.
Plaintiffs took a high risk of a wipeout by going to trial: They won only 29 percent of the cases, and 75 percent of all cases resulted in a payout of $7,500 or less.
These findings surprised the authors, given the large body of research suggesting a non-random selection of cases make it to trial, based upon whether the plaintiff or the defendant possesses better knowledge of the value of the suit. One well-known paper predicted that average settlement values should be higher than trial verdicts in such a system because defendants tend to know more about the true value of a case, and the overall win/loss ratio for each side should be around 50%.
The equal average values for settlements and trial verdicts and low win ratio for plaintiffs appear to contradict that theory, the authors note. But they could be consistent with other assumptions, including the fact defendants face reputational harm when they lose big verdicts. That could mean they take only the sure winners to trial, the authors write, driving down the odds of success for plaintiffs.
Due to the extraordinary detail required under the New York disclosure rules, the authors also discovered that half of the cases involving contingency fees were settled without a suit being filed. Plaintiffs overall abandoned 13 percent of cases without collecting anything.
Median expenses ran to 3 percent in the sampled cases. Experts were hired in 21 percent of the cases, for an average fee of $3,654 per case. The authors said they plan to use optical character recognition software to pull data from the remaining PDFs and develop a fuller understanding of the trends in fees and expenses.