View all Events
Event Governance Civil Justice

Excessive Legal Fees: Protecting Unsophisticated Consumers, Class Action Members, and Taxpayers

Thursday May 2000

The legal and popular press have followed an intense debate driven by concerns that many consumers of legal services are being charged excessive (sometimes outrageous) legal fees without their consent…either because they are not direct parties to a lawyer-client contract (class action members and taxpayers who pay the fees for government actions) or because they lack the knowledge and experience to negotiate a fair fee. The debate is fueled by the counterpoint denials that such problems exist. The Manhattan Institute Center for Legal Policy, The U.S. Chamber of Commerce Institute for Legal Reform, The Hudson Institute and The Federalist Society joined together to sponsor a one-day conference to discuss the issues.

In the early years of the practice of law in the U.S. contingency fees were prohibited based on the premise that a lawyer who is paid a percentage of a tort recovery ceases to be just an advocate and inappropriately becomes a self-interested party to the suit. Contingency fees first came into existence in the United States in 1848 when the New York State legislature, moved by a desire to provide victims of industrial accidents with ready access to the courts, repealed the state’s statutes regulating lawyer’s fees and opened the door for lawyers to become direct stakeholders in litigation.

In a 1994 Manhattan Institute publication, Rethinking Contingency Fees, Lester Brickman, Michael Horowitz, and Jeffrey O’Connell documented that contingency fee lawyers routinely charge one-third to one-half of plaintiff recoveries (often calculated from gross recoveries) effecting fees that they estimate to be from “$1,000 to $5,000 to as high as $25,000 to $30,000 per hour.” These effective hourly rates are particularly problematic when they exist in a case where liability was quickly conceded and settlement activity consisted of a few letters and calls to the defendant to reach agreement on the amount of the damages.

There is some general public awareness of the problem. A 1995 survey published inU.S. News and World Report disclosed that 56 percent of the American public believe that lawyers use the system to protect the powerful and enrich themselves.1 

Lawyers are prohibited from charging excessive fees by state ethics codes, most of which are patterned after the American Bar Association’s Model Rules of Professional Conduct. The current ABA Rule 1.5 (a) is as follows:

A lawyer’s fee shall be reasonable. The factors in the current model rule to be considered in determining the reasonableness of a fee include the following:

  1. the time and labor required, the novelty and difficulty of the questions involved, and the skill requisite to perform the legal service properly;
  2. the likelihood, if apparent to the client, that the acceptance of the particular employment will preclude other employment by the lawyer;
  3. the fee customarily charged in the locality for similar legal services;
  4. the amount involved and the results obtained;
  5. the time limitations imposed by the client or by the circumstances;
  6. the nature and length of the professional relationship with the client;
  7. the experience, reputation, and ability of the lawyer or lawyers performing the services.

There is general agreement that these rules are rarely if ever enforced. An exception: In 1998 a Colorado appeals court upheld a lower court’s decision allowing a retired hospital orderly to win back the standard percentage her lawyer took for representing her after an automobile accident in which she was seriously injured by a drunk driver. The case involved little lawyer time; it was a simple matter of collecting on a $100,000 uninsured-motorist policy that the plaintiff carried.2  But, cases like this are isolated events in what many describe as a sea of abuses. Former Chief Justice Burger, a harsh critic of the legal profession’s failure to live up to its ethical obligations noted: “Lawyers have a way of papering their profession with ‘rules’ which are advisory, vague, and widely ignored.”3  Many of the panelists at this conference echoed the view that the state progeny of ABA Model Rule 1.5 are ignored.

In 1997 the ABA created the Ethics 2000 Commission, a 13 member body that is recommending changes in the Model Rules of Professional Conduct that will go before the ABA House of Delegates this summer in Chicago, Illinois. The changes recommended in Rule 1.5 (a) are 1) that the opening statement should be rephrased to assert “A lawyer shall not make an agreement for, charge, or collect an unreasonable fee or an unreasonable amount for expenses,” and 2) a factor #8, “the degree of risk assumed by the lawyer” should be added.

The good news is that the American Bar Association is recognizing that the degree of risk a lawyer is taking should be a factor in determining the fee. The bad news is that tinkering with the language of a rule that is rarely enforced has questionable value. HALT, a highly regarded nonprofit organization of over 70,000 individual contributors that has as its mission to change the legal system to make it more equitable and affordable for the average citizen has an article in its Winter 2001 newsletter on the ABA proposed rule change. HALT describes the Ethics 2001 Commission as a “resounding waste of time.” Their point is that “The strongest ethics rules in the world are worthless if consumers don’t know about them. Yet nowhere in the hundreds of pages of new rules is there any requirement that lawyers provide clients any information about their ethical responsibilities.”

What follows is a discussion by judges, practicing lawyers, legal scholars, and a representative of the ABA of excessive contingency fees.