How cost rules influence lawyer and litigant behaviour June 10, 2009
Posted by Richard Moorhead in : Costs, Jackson Review , trackbackThis post discusses overviews what research tells us about how cost rules influence lawyer and litigant behaviour
Predicting lawyer behaviour either from first principles or from empirical research is difficult. Economic models are inevitably somewhat simplistic (even where they appear rather complicated) and empirical assessments are few and far between, as well as being confined to their specific circumstances (particular jurisdictions are involved, they often relate to specific experiments in costs reforms, and can be somewhat dated). That said, at a time when costs reform is high on the agenda it is vital to understand what that research tells us and to begin the task of understanding the possibilities and implications of costs reform.
This post focuses on a limited number of the key issues identified in Lord Justice Jackson’s preliminary report and a few extra issues which may bear some further scrutiny. The aim is to provide a brief framework to help structure discussions about costs and to challenge some of the prevalent rhetorical positions taken in debates. I have deliberately avoided referencing the paper in detail to ensure readability.
Costs as rationing
Decisions about cost regimes are often expressed in terms of efficiency and justice but they are also about rationing. They are about rationing which cases get into the justice system and how those cases progress. Whether funded under contingency fees, hourly rates, conditional fees, panel-based insurance schemes or other approaches, costs regimes structure whether a case is brought in the first place, what is done on that case, and how much of it is done. To give one example, changing to a contingency fee from a conditional fee system, for example would probably narrow access to justice at the lower end of the damages spectrum, but may increase it at the higher end. It would also probably reduce the amount of work done on those smaller cases (probably reducing quality) but may increase the work done on higher value cases. Contingency fees are automatically more proportionate for lower value cases, but do not provide access at all for cases where non-financial remedies.
US-style no costs recovery
There is a body of research looking, usually from an American perspective, at the differences between no costs recovery and ‘English’ style costs following the event. Broadly the theory and, such as it is, the evidence suggests that:
• Under the US-system, more, poorer quality cases are probably brought because the claimant does not bear the risk of losing. This effect is mitigated by the need for lawyers bringing these cases not to take on too many losing cases (that is just because the claimant bears no risk, it does not mean their lawyer does not bear any risk). It is unclear whether the effect or its mitigation is stronger. Furthermore poorer is a relative judgment: poorer does not necessarily mean poor.
• Partly because of over-confidence effects on both sides, the level of costs incurred on cases increases under ‘English’ style rules (one study estimates 40-60% increases).
• The suggestion that there is no incentive on claimants to settle under US-style rules is countered by evidence of strong pressures on their lawyers to settle (some evidence would suggest to settle prematurely) because of their own need to minimise risk and constrain their own costs. There is also evidence that the parties exchange more offers under a no costs regime.
• It is possible, to have no costs systems with a ‘Part 36’ style cost shifting. There is some evidence, where this has been tried, that it may give rise to similar types of settlement at lower costs to defendants (which should also have the effect of making the cases more profitable to claimants without prejudicing the result for claimants).
No costs rules have a further specific rationing effect – making uneconomic the bringing of cases where the costs of pursuing a case outweigh the gains. Such cases are unlikely to be brought unless the party (or their lawyer) is sufficiently wealthy and motivated to invest in bringing the case.
Contingency Fees
The research suggests the following:
• In the US, contingency fees were found to be more profitable than hourly fee cases but these extra profits had to be set off, in part at least, against the risks of pursuing those cases.
• Claimants are willing to pay their lawyers more under contingency fees than they would under non-contingency fee agreements because of the way such arrangements shield them from risk.
• There is some evidence that for certain cases, especially low value cases, lawyers on contingency fees reduce their effort compared with hourly fee lawyers but for other (higher value) cases their effort increases.
• Although levels of profit on small value cases are low and sometimes uneconomic when considered in isolation, the US system still supports large volumes of low value cases. This may partly be due to larger cases cross-subsidising the lower value cases and, similarly, because US tort lawyers need a steady stream of smaller cases to have access to the bigger, more profitable cases. Referral systems may promote cross-subsidy between firms (see below).
• The system does not only operate in areas of litigation where success rates are very high. In particular, medical malpractice litigation, where as many as 70% of claims are not successful post-issue, is supported through a contingency fee system.
• There are limits to the extent to which comparisons with the US can be drawn. The higher levels of damages awarded at the upper range of cases in the US is probably crucial.
• There is some concern that the levels of percentage fee allowed to lawyers is disproportionate to the effort they expend on cases and may lead to the exploitation of the client (who pays out of their damages). This criticism is most often voiced in some class action cases (where on occasion large settlements may be won for disinterested clients with relatively small effort) and in medical malpractice cases. On the latter, there is evidence that contingency fee percentages are regulated to reduce the number of claims, rather than to protect the interests of claimants. Where contingency fees are regulated, the imposition of fee caps increases the number of cases that are dropped and also reduces the level of damages that cases settle for.
Market control by the client – a fallacy?
One of the key criticisms fairly made of recoverable CFAs is the absence of any market pressure on lawyers to reduce their success fees (and to keep ATE premiums to a minimum). Research on client perspectives in the US is as far as I am aware non-existent. Research on charging tends to show that contingency fees gravitate towards natural numbers (a third or a quarter) and this suggests an absence of competition on price. My own research, and other work on clients in the UK, suggest that clients do not shop around for lawyers in the contingency fee field on the basis of price (or indeed any other factor beyond availability). In general, they approach a lawyer and accept their charges, without being advised in a meaningful way of alternatives. Typically they also have a very limited understanding of their fee agreements. It is often speculated that a shift towards making clients responsible for success fees/ATE premiums will make a level of client control of (say) success fees more likely. Whilst such a shift cannot make it less likely, the capacity of clients to understand and negotiate with lawyers on costs may not make it likely. Currently there is no evidence that they even shop around.
The idea that contingency fees are simple and therefore easily understood by clients is not borne out by my own research in this area. No win no fee agreements are not always, or even ordinarily it seems, simple nor are they well understood by clients.
Relying on good costs advice to protect clients does not seem effective. Research suggests lawyers do not advise their clients of alternative sources of funding which may be more in the client’s interests if those lawyers do not themselves provide it at least they do not seem to do so in ways that the client recalls or understands.
Costs and settlement issues
Different fee arrangements give rise to different incentives to settlement. Typically contingency fees are associated with two mutually inconsistent ideas: one is that contingency fees drive up the level of compensation claims (because the lawyers have an interest in the outcome) and the second is that they lead to under-settlement (because their comes a point at which the risks and costs of proceeding for a lawyer outweigh any gain from pushing for a higher settlement, say at the point at which trial preparation would have to begin in earnest).
There is some evidence that lawyers may be more inclined to settlement under contingency fees, and less inclined to go to trial, and some evidence that settlements may be lower (in the US in one unusual jurisdiction, and the statistical models used for that study have been queried). My own studies suggest a mixed picture, that there is pressure to settle under contingency fees in a no-costs recovery scheme (employment tribunals), but whether this pressure leads to injustice is more questionable partly because there are pressures to settle under all schemes (trade union and insurers have obvious interests in cases settling early, private paying clients may be more risk averse than other claimants). It is worth noting that lawyers have reputational pressures which may counteract pressures to under-settle. Thus lawyers may be wary of giving the client the impression that the case was settled for less than it was worth (although my own view is that clients can be relatively easily managed by experienced lawyers to avoid this regardless of the quality of any actual settlement).
More persuasively, contingency fee lawyers may have reputations to protect with opponents which inhibits under-settlement: settling for a low sum on one case may weaken their reputation with opponents and lead to generally depressed contingency-based earnings if the lawyer becomes perceived as a soft touch.
A particular issue is whether pressure to settle becomes pressure to undersettle. The research under consideration almost never evaluates, in a normative sense, the quality of a settlement – it just seeks to predict or demonstrate whether settlement under one regime is lower than settlement in another. It is worth noting, for instance, that we do not have a comparison of how settlement under a CFA system would compare with settlement under a contingency fee system.
Pressures on claimant lawyers are not generally as simplistic as debates and, indeed, research tends to assume. Thus, even with CFAs on cases with good merits on liability/causation, a claimant lawyer may be under some economic incentives to settle the case. In addition to the impact of any sensibly judged Part 36 offers from defendants, they have issues such as cash-flow and, if not partners, internal fee earning targets to consider.
Procedural interventions
Research on what to do about costs problems is even thinner on the ground than research about costs generally. There has been work on a number of interventions designed, in part, to tackle costs issues most notably pre-action protocols, ADR and court management. I would characterise these as procedural interventions. The interjection of requirements to take certain steps in the belief that these will lead to earlier settlement and so lower costs or, in the case of court management, better managed litigation (which is therefore lower in costs). Each of these interventions requires investment of extra time in the belief that this will generally pay dividends. The research has tended to suggest that such steps fail. Litigation may be ‘better’ as a result, but it is usually more expensive. Part 36 offers are an exception, although in fact these have not been rigorously tested by quantitative research methods. They may be somewhat different in any event as the investment required to make a Part 36 offer may be rather modest compared to the pay-off of settlement which may result.
Referral relationships
Lord Justice Jackson’s report is understandably hostile to referral fees. I share many of his misgivings. It should be noted, however, that there is no significant research done on this outside of the United States. It is worth adverting to one positive manifestation of referral relationships there. Referral arrangements are often on a contingency fee basis. That provides an interesting incentive for firms to refer on cases that are beyond them because they do not have the skills to handle such cases and/or because they do not have the financial resources to take on cases requiring significant investments of time and/or money. The benefits of such a system are that a) a claimant is more likely to get referred on to a firm genuinely equipped to handle their case; and, b) the referring firm has an incentive to monitor the quality of the firms they refer work. As far as I am aware, we have no such incentives in our system.
There are draw-backs to such a system. It could be argued that the referring firm is over rewarded (they may get one third of the ultimate fee, which effectively means they get 10% of a claimants damages) and the client is referred to a firm which it would seem could afford to take the claim for 23% not 33% (but for the referral). It should be noted, however, that research suggests that the firms receiving the referrals believe that the marketing and other costs of getting similar quality claims in any other way are more expensive. Whether firms actually monitor quality and whether referral arrangements are based on other factors are not known.
What about defendants
The eagle-eyed will have noted that much of this discussion concentrated on claimants and claimant lawyers. There is a good reason for that: very little research has been conducted on defendants. We know almost nothing about the working practices of defendants and, in particular, their attitudes to risk. This is probably for two reasons. Researchers have generally found claimant lawyers more interesting, probably because they interface with actual claimants in a way that insurers do not usually interface with their insured (at least on tort claims). Secondly, defendants may have been more reluctant, for reasons of commercial confidentiality, to expose their working practices to scrutiny.
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