Lawyer Fees and Lawyer Behavior in Litigation: What Does the Empirical Literature Really Say?

Abstract

O'er lawyers' fingers, who straight dream on fees.l Then `tis like the breath of an unfee'd lawyer.2 [M]ost lawyers will prefer to leave no stone unturned, provided, of course, they can charge by the stone.3 Billing by the hour is fine, provided I get to define what constitutes the hour. 4 I. Introduction Lawyers' fees and lawyers' billing practices are the subject of much commentary, humorous and otherwise. Given that the size and nature of lawyers' fees are of great importance to lawyers, to their clients, and to the larger public, this comes as no surprise. In this Article, I review the empirical literature that provides evidence of the impact of legal fees and fee regulation, both on lawyers and on their clients. My assumption is that impacts on clients and impacts on lawyers are one and the same, and any distinction between the two is primarily due to the lens through which one is looking. I focus on two particular topics: how fees are computed and who actually pays the fees. There are many questions one could ask about the impact of legal fees, even limited to these two broad topics. The empirical literature, however, is quite thin, which substantially limits what we actually know based on systematic research. In introducing the core sets of research, I will also make selective reference to theoretical analyses of fee arrangement issues. These theoretical perspectives typically draw on the tools of economic analysis, starting from the standard economic assumption of rational decisionmaking. The analyses then examine the expected behavior of an economically rational actor. IMAGE FORMULA29 II. The Organizing Dimensions A. Methods of Computing Legal Fees Lawyers are nothing if not creative, and this creativity manifests itself in the many different ways lawyers have devised for calculating their fees. The vast array of fee calculations can be grouped into six general types of computation: * fixed fees where the lawyer specifies a fee in advance, typically for routine work where the tasks are well defined and predictable; * time-based fees where the lawyer tracks his or her time and calculates the fee by multiplying the time by some hourly rate; * task-based fees where the lawyer charges fixed amounts for subtasks-writing a letter, making a telephone call, etc.-much like a physician who charges by procedure or an auto mechanic who relies upon the book rate to specify the time for various tasks; * statutory, or other law-based, fee schedules typically tied in some way to the value of the transaction or the amount in controversy; * commission-based fee arrangements in which the lawyer's fee is based on some percentage of the amount recovered or the value of the matter being handled (in probate work, for example, the fee is often computed based on the value of the estate); and * value-based fee systems, in which the lawyer makes a judgment about what the work and result were worth to the client and sets the fee accordingly (what the client is willing to pay may of course exert some influence on the fee ultimately charged). Missing from the above list are the no-win, no-pay the fee, the conditional fee, and the lodestar fee. Except for the commission-based which, in contentious work, is by nature a contingency these are not methods of calculation. A lawyer can incorporate an increase or reduction based on outcome into any of the first three methods of calculation. Success bonuses and failure discounts are inherent in the last two arrangements. I will discuss the contingency element of fee calculation as a subtopic of fee computation. B. Who Pays for Legal Services The question of who pays the lawyer's or alternatively, who covers the cost of the lawyer's services, is more straightforward. …