Chicago-Kent Law Review Volume 71 Issue 2 Symposium on Fee Shifting Article 10 December 1995 Litigating on a Contingency: A Monopoly of Champions or a Market for Champerty Richard W. Painter Follow this and additional works at: https://scholarship.kentlaw.iit.edu/cklawreview Part of the Law Commons Recommended Citation Richard W. Painter, Litigating on a Contingency: A Monopoly of Champions or a Market for Champerty, 71 Chi.-Kent L. Rev. 625 (1995). Available at: https://scholarship.kentlaw.iit.edu/cklawreview/vol71/iss2/10 This Article is brought to you for free and open access by Scholarly Commons @ IIT Chicago-Kent College of Law. It has been accepted for inclusion in Chicago-Kent Law Review by an authorized editor of Scholarly Commons @ IIT Chicago-Kent College of Law. For more information, please contact [email protected], [email protected]. LITIGATING ON A CONTINGENCY: A MONOPOLY OF CHAMPIONS OR A MARKET FOR CHAMPERTY? RICHARD W. PAINTER* Two of the most divisive issues in current debate over civil litiga- tion are whether there should be limitations on lawyers' contingent fees and whether losing parties should be required to pay winners' legal expenses. Proponents of litigation reform urge both measures,1 but opponents argue that some "reforms" would be unfair to plaintiffs and would make litigation unaffordable for most people. 2 However, both debates hinge on a broader issue: how and when lawyers should share the risks of litigation. This Article examines the economic and ethical implications of such risk sharing by lawyers and their clients. In particular, this Article discusses whether the market for risk sharing * Assistant Professor of Law, University of Oregon School of Law. B.A., Harvard Uni- versity, 1984; J.D., Yale University, 1987. I would like to thank Lester Brickman, Chuck O'Kelley, Harold Krent, and Jennifer Duggan for helpful comments on prior drafts of this Article. 1. See Private Securities Litigation Reform Act, 15 U.S.C.A. § 77z-1(c) (West Supp. 1996) (requiring mandatory review by the court for attorney compliance with Rule 11(b) of the Fed- eral Rules of Civil Procedure, mandatory sanctions for violation of Rule 11(b), and a presump- tion in favor of attorneys' fees and costs as the sanction for failure to comply with Rule 11(b)) [hereinafter SLRA]. An earlier draft of the SLRA had gone even further in seeking to impose attorneys' fees as a sanction for unmeritorious suits. See H.R. 1058, 104th Cong., 1st Sess. § 20B(c) (1995) (stating that a court shall award attorneys' fees to the prevailing party if "(A) the position of the losing party was not substantially justified, (B) imposing fees and expenses on the losing party or the losing party's attorney would be just, and (C) the cost of such fees and expenses to the prevailing party is substantially burdensome or unjust"). The SLRA requires that attorneys' fees be a "reasonable percentage of the amount of any damages and prejudgment interest actually paid to the class," 15 U.S.C.A. § 77z-1(a)(6) (West Supp. 1996), and that any proposed settlement agreement disseminated to a class of shareholders shall state the attorneys' fees applied for, including calculation of those fees on a per share basis and a brief explanation of the basis for the application. Id. § 77z-l(a)(7). Similar provisions were included in a bill in the House of Representatives, covering diversity suits and suits over products liability. See H.R. 10, 104th Cong., 1st Sess. § 101 (1995). A proposal to require losing plaintiffs to pay defendants' legal expenses in securities lawsuits was defeated in the California March 26, 1996, primary elec- tion. See B. Drummond Ayres, Jr., Cougars and Lawyers Come out Ahead in Propositionson California Ballot, N.Y. TIMES, Mar. 28, 1996, at All. For discussion of proposals to limit law- yers' contingent fees, see infra text accompanying notes 17-20. 2. Injustice for Consumers, N.Y. TIMES, Mar. 8, 1995, at A20 (editorial). "The so-called British rule of 'loser pays' is alien to the American system of accessible justice. House Republi- cans seek nothing less than a crippling of the system of contingent fee arrangements that allow plaintiffs without great riches to retain good lawyers, who charge nothing if they lose and a share of the winnings if they win." Id. "The lesson is clear: A plaintiff of modest income would face far worse odds against a rich defendant under the British rule." Anthony Lewis & Charles Pe- ters, Tort and Retort: Should We Make Litigants Pay for the Cost of the Court Cases They Lose?, WASH. MONTHLY, May 1993, at 9. CHICAGO-KENT LAW REVIEW [Vol. 71:625 by lawyers is competitive and whether there are feasible alternatives to that market, such as insuring litigation costs with third parties. Charging on a contingency is most prevalent in the personal in- jury arena,3 but has spread to antitrust litigation, 4 shareholder deriva- tive suits,5 patent litigation, 6 mergtrs and acquisitions, 7 securities litigation,8 and even lobbying.9 This practice remains unique to the 3. Ninety-five percent of personal injury cases are taken on a contingency. Note, Settling for Less: Applying Law and Economics to Poor People, 107 HARV. L. REV. 442, 448 n.23 (1993) (citing JAMES S. KAKALIK & NICHOLAS M. PACE, COSTS AND COMPENSATION PAID IN TORT LITIGATION 37 (1986)). Although contingent fees traditionally are charged by plaintiffs' lawyers, defense lawyers occasionally charge "reverse contingent fees," which are an agreed upon per- centage of the amount the client saves. See Carrie Menkel-Meadow, Culture Clash in the Quality of Life in the Law: Changes in the Economics, Diversificationand Organizationof Lawyering, 44 CASE W. RES. L. REV. 621, 655 n.163 (1994) (discussing Aetna Insurance Company's policy of requesting "blended" value-billing from its lawyers, including a contingent fee with "reverse bonus for low settlement rates in defense work"). The ABA Standing Committee on Ethics and Professional Responsibility has concluded that in civil cases as long as the fee arrangement real- istically estimates the risk involved in a case, the fee is consistent with the Model Rules. See ABA Comm. on Ethics and Professional Responsibility, Formal Op. 373 (1993). 4. See Milton Handler, The Shift from Substantive to ProceduralInnovations in Antitrust Suits-The Twenty-Third Annual Antitrust Review, 71 COLUM. L. REV. 1, 9-10 (1971). 5. In derivative suits, as in securities class actions, attorneys' fees are actually paid under the "common fund" doctrine that allows a named plaintiff who creates a fund for the benefit of other injured investors to recover attorneys' fees from the fund. See George D. Hornstein, The Counsel Fee in Stockholder's Derivative Suits, 39 COLUM. L. REV. 784, 786 (1939). Judge Ralph K. Winter observes that "[t]he real incentive to bring derivative actions is usually not the hope of return to the corporation but the hope of handsome fees to be recovered by plaintiffs' counsel." Joy v. North, 692 F.2d 880, 887 (2d Cir. 1982), cert. denied, 460 U.S. 1051 (1983). 6. See Andrea Gerlin, Patent Lawyers Forgo Sure Fees on a Bet, WALL ST. J., June 24, 1994, at BI. Patent lawyer Gerald Hosier of Aspen, Colorado, used contingent-fee agreements and then settled many claims "by striking licensing deals valued at about $450 million with al- leged infringers. [His] contingency-fee agreement ... entitled him to a portion of the proceeds. In 1992, he earned an estimated $150 million." Id. 7. Daniel Hertzberg & James B. Stewart, Contingency Legal Fee for Merger Breaks Ground, Stirs Controversy, WALL ST. J., Oct. 24, 1986, at 31 (discussing "performance fee" charged by Wachtell Lipton and Skadden Arps). However, the vast majority of corporate work is billed at an hourly rate, a practice that gives rise to its own ethical issues. See William G. Ross, The Ethics of Hourly Billing by Attorneys, 44 RUTGERS L. REV. 1 (1991); George D. Hornstein, Legal Therapeutics: The "Salvage" Factor in Counsel Fee Awards, 69 HARV. L. REV. 658 (1956). 8. Contingent fees are commonplace in class action securities cases under § 11 of the 1933 Securities Act, 15 U.S.C. § 77k (1994), and § 10 of the 1934 Securities Exchange Act, 15 U.S.C. § 78j (1994), although some courts require lawyers to bid against each other for the work. See In re Oracle Sec. Litig., 131 F.R.D. 688, 697 (N.D. Cal.), 132 F.R.D. 538, 539, 542 (N.D. Cal. 1990), 136 F.R.D. 639, 641 (N.D. Cal. 1991) (outlining Judge Walker's imposition of bidding procedures on lawyers' seeking to become lead counsel in action brought against accountants). But see In re Activision Sec. Litig., 723 F. Supp. 1373, 1378-79 (N.D. Cal. 1989) (making judge-devised, bench- mark percentage-fee suggestions); Paul, Johnson, Alston & Hunt v. Graulty, 886 F.2d 268, 272 (9th Cir. 1989) (same). An intriguing fee arrangement was proposed when investors in Madison Plaza Associates, a limited partnership, made claims on a $330 million compensation fund set up by Prudential Securities to settle federal regulators' fraud allegations in connection with sale of the limited partnership interests. Baker & McKenzie, which also represented the general part- ner of Madison, agreed to represent the investors making claims against the Prudential fund for a contingent fee, but also insisted that part of any recovery be reinvested in Madison and "at least ten percent... be turned over to Madison's... general partner." Kurt Eichenwald, Baker Firm Withdraws Counsel Plan, N.Y. TIMES, Aug. 30, 1994, at D3 [hereinafter Baker Firm]; Kurt 1995] LITIGATING ON A CONTINGENCY United States; most other jurisdictions, including England and Scot- land, prohibit contingent fees in many circumstances.