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22 Stan. L. Rev. 1125 (1969-1970)
An Economic Analysis of the Contingent Fee in Personal-Injury Litigation

handle is hein.journals/stflr22 and id is 1139 raw text is: An Economic Analysis of the Contingent Fee in Personal-Injury Litigation Murray L. Schwartz* Daniel J. B. Mitchellt The legal profession's price structure is based, in large part, upon a time function, whether calculated on an hourly rate or by a less precise for- mula. This method of pricing is consistent with the theory that a lawyer's time increases the value of whatever service he is providing. One apparent exception to the time-function concept is the contingent fee, which is based not upon how long the lawyer works but upon the return he produces for his client. If the client does not recover, the lawyer receives no fee. In par- ticular types of legal controversies, like eminent domain, collections, and representation of plaintiffs in personal-injury actions, contingent fees have become the accepted, if not exclusive, form of pricing. Three common justifications for the contingent fee are: (i) By making the lawyer's gross earnings depend upon the magnitude of the client's recovery, the contingent fee gives the lawyer a direct incentive to work in his client's interest. Like a production worker paid on a piece rate, the greater the lawyer's output, the greater his reward. Unlike a factory man- ager, however, the client is unlikely to be able to evaluate the lawyer's work. Hence, the contingent fee's incentive effect appears to assure the client that the lawyer will be on his side despite the fact that the client does not under- stand the intricacies of litigation. (2) The contingent fee allows the client to shift some of the risk inherent in his case to the lawyer. If the client does not recover, the lawyer receives no fee. If a client who agrees to pay his lawyer an hourly fee does not recover, he incurs a negative return (the law- yer's charge). The lawyer bears some of the risk under the contingent fee, since settlement may be less than he expected, and his share of the settle- ment not fully compensate for his time. (3) The contingent fee allows the client to borrow the lawyer's services in advance of settlement. Because a personal-injury claim has economic value, the client, in principle, should be able to borrow in the capital market against his eventual recovery. In fact, the client's access to the capital market will be limited, particularly if *B.S. 1942, Pennsylvania State College; LL.B. '949, University of Pennsylvania. Professor of Law and Dean, School of Law, U.C.L.A. t A.B. x964, Columbia College; Ph.D. 1968, Massachusetts Institute of Technology. Assistant Professor, Graduate School of Business Administration, U.C.L.A. 1125

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