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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