Contingent Fees Research Articles

A Patent System with a Contingent Delegation Fee under Asymmetric Information

Abstract Under the framework of a two-stage innovation process in which the first-stage innovation is commercialized by multiple firms at the second stage, this study proposes an optimal patent system for efficient commercialization by a lower cost firm when the R&D costs are private information. Under the existing patent system of granting patents sequentially to successful innovators, the commercialization can be achieved by an inefficient firm (called control loss) and duplicative R&D efforts may occur through competitive innovation race. This study shows that the problems of control loss and duplicative R&D efforts can be prevented if the patent office grants a patent with a mandatory contingent delegation fee only to the first innovator. A carefully designed contingent fee function can induce the first innovator to internalize the patent office’s objective function, leading to efficient commercialization by a lower cost firm.

The Litigation Finance Contract

Litigation funding (“LF”) — for-profit, non-recourse funding of a litigation by a non-party — is a new and rapidly developing industry. It has been described as one of the “biggest and most influential trends in civil justice” today by RAND, the New York Times and others. Despite the importance and growth of the industry there is a complete absence of information about or discussion of litigation finance contracting, even though all the promises and pitfalls of litigation funding stem from the relationships those contracts establish and organize. Further, the literature and case-law pertaining to LF have evolved, in their entirety, from an analogy between LF and contingency fees, viewing both as ethically compromising exceptions to the champtery doctrine. On that view, such exceptions create risks of an undesirable loss of client control over the case, of compromising lawyers’ independent judgment and of potential conflicts of interest between funders, lawyers and clients. This article breaks away from the contingency analogy and instead posits an analogy to venture capital (“VC”). It shows the striking resemblance of the economics of LF to the well-understood economics of VC. Both are characterized by extreme (1) uncertainty, (2) information asymmetry, and (3) agency costs. After detailing the similarities and differences of these two types of financing, the article discusses which contractual arrangements developed in the venture capitalism directly apply to litigation finance; which ones need to be adapted; and how such adaptation can be achieved. Since much of the theory, doctrine and practice of VC contracting can be applied or adapted to litigation finance, practitioners and scholars can be spared decades of trial-and-error in developing standardized contractual patterns. In addition, the analogy turns most of the conventional wisdom in the field on its head. This article argues that funders should be viewed as real parties in interest; funders should obtain control over a funded litigation and; attorneys should take funders’ input into account. In return, funders should pay plaintiffs a premium for the control they receive, subject themselves to a compensation scheme that aligns their interests with those of the plaintiffs and enhance the value of claims by providing non-cash contributions. Courts and regulators should devise rules that enhance the transparency of the industry, in particular the performance outcomes of various LF firms and their ethical propensities. Such a legal regime will foster the emergence of a reputation market that will police the industry and support contractual arrangements.

The Netherlands – Contingency fees entering the Dutch legal system

Leny E. de Groot-van Leeuwen (University of Utrecht and University of Nijmegen) comments on discussions amongst legal professionals in the Netherlands on the status of contingency fees (“no cure, no pay”). Published in the Letter from … section of Amicus Curiae - Journal of the Institute of Advanced Legal Studies and its Society for Advanced Legal Studies. The Journal is produced by the Society for Advanced Legal Studies at the Institute of Advanced Legal Studies, University of London.

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Do Poor People Sue Doctors More Frequently? Confronting Unconscious Bias and the Role of Cultural Competency

There is a perception that socioeconomically disadvantaged patients tend to sue their doctors more frequently. As a result, some physicians may be reluctant to treat poor patients or treat such patients differently from other patient groups in terms of medical care provided. We (1) examined existing literature to refute the notion that poor patients are inclined to sue doctors more than other patients, (2) explored unconscious bias as an explanation as to why the perception of the poor being more litigious may exist despite evidence to the contrary, and (3) assessed the role of culturally competent awareness and knowledge in confronting physician bias. We reviewed medical and social literature to identify studies that have examined differences in litigation rates and related medical malpractice claims among socioeconomically disadvantaged patients versus other groups of patients. Contrary to popular perception, existing studies show poor patients, in fact, tend to sue physicians less often. This may be related to a relative lack of access to legal resources and the nature of the contingency fee system in medical malpractice claims. Misperceptions such as the one examined in this article that assume a relationship between patient poverty and medical malpractice litigation may arise from unconscious physician bias and other social variables. Cultural competency can be helpful in mitigating such bias, improving medical care, and addressing the risk of medical malpractice claims.

Allocating risk capital for a brownfields redevelopment project under hydrogeological and financial uncertainty

In this study, we defined risk capital as the contingency fee or insurance premium that a brownfields redeveloper needs to set aside from the sale of each house in case they need to repurchase it at a later date because the indoor air has been detrimentally affected by subsurface contamination. The likelihood that indoor air concentrations will exceed a regulatory level subject to subsurface heterogeneity and source zone location uncertainty is simulated by a physics-based hydrogeological model using Monte Carlo realizations, yielding the probability of failure. The cost of failure is the future value of the house indexed to the stochastic US National Housing index. The risk capital is essentially the probability of failure times the cost of failure with a surcharge to compensate the developer against hydrogeological and financial uncertainty, with the surcharge acting as safety loading reflecting the developers' level of risk aversion. We review five methodologies taken from the actuarial and financial literature to price the risk capital for a highly stylized brownfield redevelopment project, with each method specifically adapted to accommodate our notion of the probability of failure. The objective of this paper is to develop an actuarially consistent approach for combining the hydrogeological and financial uncertainty into a contingency fee that the brownfields developer should reserve (i.e. the risk capital) in order to hedge their risk exposure during the project. Results indicate that the price of the risk capital is much more sensitive to hydrogeological rather than financial uncertainty. We use the Capital Asset Pricing Model to estimate the risk-adjusted discount rate to depreciate all costs to present value for the brownfield redevelopment project. A key outcome of this work is that the presentation of our risk capital valuation methodology is sufficiently generalized for application to a wide variety of engineering projects.

The Rise of Contingent Fee Representation in Patent Litigation

It is well known that contingent representation is on the rise in patent litigation. But why? And what are the lawyers in the field like? Although scholars have studied contingent litigation in other contexts — such as medical malpractice, personal injury, and products liability litigation — patent litigation has received almost no attention. This gap in the literature is unsettling because patent litigation is different from these other fields of contingent litigation in important and interesting ways. These differences include: patent litigation is much more uncertain; the costs of litigating claims are usually significantly higher; and patents, including their underlying infringement claims, are freely assignable. Absent in most other contingent litigation contexts, these characteristics of patent litigation shed light on the broader topics of litigation and contingency relationships in general.Drawing upon several sources of data, including in-depth interviews with over forty lawyers involved in contingent representation in patent litigation and examination of over forty contingent fee agreements, this Article provides the first comprehensive analysis of the rapid evolution of contingent representation in patent law. The development of contingent representation includes top-tier litigation firms recently transitioning to taking on high value contingent cases, small entrants representing plaintiffs in lower value cases, and numerous general practice firms experimenting with contingent patent litigation. These diverse players each select and litigate cases using varied methods, resulting in different levels of risk and reward. The Article uses the study of these players to discuss how and why attorney-client contingent relationships established in the nascent marketplace of patent contingent litigation differ from other types of contingent litigation, and what patent law can teach about contingent representation in general. It also lays the foundation for future quantitative research comparing the results of contingent and hourly billing representation.

Financing Litigation: A Comparative Analysis

In this paper, we analyze three different ways to finance litigation, namely (i) self-finance by plaintiff s, (ii) contingent fees arrangements and (iii) third-party financing. We analyze how these models impact on the access to justice, and on the decision to settle or to go to courts, when claims can be meritorious or frivolous. Our results show that third-party financing does not always enlarge the access of a plaintiff to justice, nor the equilibrium settlement amount, especially when the rate of return on capital required by the investors is high.

The Puzzling Uniformity of Lawyers’ Contingent Fee Rates: An Assortative Matching Solution

Lawyers’ Contingent Fee (CF) rates are rather uniform, often one-third of the recovery. Arguably, this uniformity attests to collusion in the market, resulting in clients paying supra-competitive fees. This paper challenges this common argument.Uniform CF rates are not necessarily superior to negotiable ones; yet they provide clients with an important advantage. They result in clients making a defacto “take-it-or-leave-it” offer. It precludes lawyers from exploiting their private information about the lawsuit’s expected value and the amount of work it requires. The uniformity of CF rates enables clients to hire the best available lawyer, either directly, if clients know lawyers’ ranking, or indirectly, through the referral system. This uniformity thus fosters a positive assortative matching of lawyers and clients. Finally, the fact that both direct clients and clients obtained through paid-for referrals pay the same CF rate does not attest to cross-subsidization, as the cases a lawyer gets through referrals are quite different than those she gets directly.

From PI to IP: Yet Another Unexpected Effect of Tort Reform

Is there a connection between state-law tort reform and the explosive growth of U.S. intellectual property (IP) litigation? The literature has established that the number of tort claims in states with tort reform has gone down. How do personal injury (PI) plaintiff lawyers deal with the decrease in the demand for their services? Could a significant number of them end up shifting their practice toward IP law? Although David Schwartz’s interviews with contingent-fee litigators have led him to suggest that “[m]ost lawyers whose practice consists of substantially all patent contingent litigation are primarily and historically patent litigators,” David L. Schwartz, The Rise of Contingent Fee Representation in Patent Litigation, ALA. L. REV. (forthcoming), available at http://ssrn.com/abstract=1990651, there is pre-existing anecdotal evidence that some proportion of PI lawyers have switched substantially to IP. Using data gathered from various sources, including Lex Machina and the Database of State Tort Law Reforms, we find more systematic evidence of a related proposition — namely, that state tort reform significantly and substantially increases copyright and patent filings in U.S. district courts in the states where tort reform has occurred. In contrast, the evidence does not indicate a similarly significant effect on trademark and trade-secret filings. One potential explanation for the apparently different results for copyright and patent as opposed to trade secret and trademark is that, to the extent tort reform has produced an increase in trademark or trade-secret filings, that increase has been concentrated in state courts, rather than federal district courts that have exclusive jurisdiction over patent and copyright cases. Alternatively, it could be that PI attorneys moving into other areas of practice are more likely to gravitate toward patent litigation and copyright litigation, rather than trademark litigation or trade-secret litigation, perhaps because patent litigation and copyright litigation offer more opportunities for lucrative suits brought by non-incumbent industry players (e.g., independent inventors or startup firms) who might be most likely to seek the services of former PI attorneys. Finally, it should be noted that the apparent differential growth of patent and copyright litigation in states that have undergone tort reform might not be explained substantially by a lawyer-based shift from PI to IP at all. Instead, the primary mechanism for such differential growth could be court-based: for example, a post-reform decrease in docket congestion could make a state’s U.S. district courts significantly more attractive for IP filings, either directly by making litigation in those courts speedier or indirectly by freeing time for the courts to adopt rules for IP litigation that parties find attractive. This paper discusses such potential explanations and considers their plausibility in light of the paper’s new empirical evidence as well as other available data.

Thoughts on the American Rule and Contingency Fees

Senior Costs Judge Peter T. Hurst examines the ‘American Rule,’ which generally does not allow fee recovery in the US litigation with some important exceptions. The Article critically assesses the American contingency fee regime as the UK Government weighs the Lord Justice Jackson’s Cost Review, which proposed, among other things, to allow the contingency arrangement on a limited basis.

Revisiting Class Actions Against the Crown: Balancing Public and Private Legal Accountability for Government Action

Five years ago, I began to notice a trend toward more numerous and wide ranging class actions against the Crown, seeking redress for state action against those claiming they were especially harmed by that action. Some of these class actions – for example, seeking remedies for the Crown’s role in the SARS or Mad Cow outbreaks – sought billions of dollars of damages. Many of these class actions, in my view, involved the review of ministerial decision-making and could have been framed as judicial reviews in the conventional administrative law sense. Was the incentive for mass recovery and soaring contingency fees driving more lawyers to frame unfair or unreasonable government decisions as violating tort and contract standards? Was I witnessing another dimension of access to justice and progressive behaviour modification through class actions, or alternatively, did this trend represent a distortion of public accountability through private claims?

Making Plaintiffs Whole: A Tax Problem of Interest

This article illustrates the dramatic tax impact of interest awards in otherwise non-taxable litigation recoveries and proposes two alternative legislative solutions for the over-taxing of plaintiffs in these cases. While plaintiffs who recover personal injury awards typically receive favorable tax treatment, those who receive interest on such awards are taxed on the interest and often are not able to utilize deductions for attorney’s fees and other costs paid to obtain the award. Further, the attorney’s portion of the recovery in a contingency fee arrangement will also be included in the plaintiff’s gross income. The result is that the plaintiff recovers less of the interest than the Treasury or her attorney, preventing the plaintiff from truly being made whole. After reviewing the historical and theoretical framework that produces these results, I suggest previously-proposed judicial solutions to the problem are impracticable and a legislative solution is necessary. I conclude with a proposal for two alternative legislative solutions - an expanded deduction and an exclusion - to provide relief for plaintiffs recovering partially taxable awards and to achieve the policy of fully compensating injured plaintiffs.

Foreign Plaintiffs, Forum Non Conveniens, and the 1999 Montreal Convention

The purpose of this article is not so much to focus on the multitude of successful forum non conveniens motions that have been granted in recent years by US courts, but rather to focus on the increasing frequency of foreigners (i.e., non-citizens and non-residents) opting to sue in the United States. They do this because in many instances they are aggressively solicited by US-employed so-called 'consultants' who tell them that they can not only enjoy contingency fee arrangements in retaining their US lawyers, but that they can also enjoy the likelihood of much larger financial recoveries than could be expected from the courts in their own countries. Even if these representations are in fact true, the issue addressed by the author is the propriety of foreigners seeking access to US courts for these purposes. The author briefly examines the decisions in several of the more recent aviation accident cases. A disproportionate number of them, as can be seen, involve accidents that occurred abroad, on foreign airlines - many of which do no business in the United States and, hence, are not subject to US jurisdiction - and with victims that are mostly or all citizens of foreign countries. Finally, the author proposes an approach that he believes would help to eliminate or, at the least, lessen the frequency with which foreign citizens resort to US courts following aviation accidents abroad while, at the same time, providing foreign plaintiffs who are victims of international air mishaps with faster and more certain resolution of their claims. The author also proposes what he believes is a much better and more efficient system for determining whether courts abroad are available and adequate for purposes of allowing a US court to grant a forum non conveniens dismissal.

Legislative Proposals to Address the Negative Consequences of the Dodd-Frank Whistleblower Provisions: Written Testimony Submitted to the U.S. House Committee on Financial Services, Subcommittee on Capital Markets and Government Sponsored Enterprises

The author testified at a U.S. House Committee on Financial Services, Subcommittee on Capital Markets and Government Sponsored Enterprises hearing on May 11, 2011. The hearing explored a discussion draft of legislation which would modify the whistleblower bounty provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The author's testimony suggested that the proposed reforms, which included a requirement of internal reporting to preserve a whistleblower's bounty eligibility, a change from mandatory to discretionary bounties, and a prohibition on contingency fees, would dull the incentives Dodd-Frank's bounty provision was meant to foster.

Informational externalities and settlements in mass tort litigations

This paper elaborates on a basic model of mass tort litigation, highlighting the existence of positive informational externalities afforded by the discovery process (as a general technology of production of evidences) in order to study when a class action is formed, or when a sequence of individual trials is more likely. We illustrate the argument that when several plaintiffs file individually a lawsuit against the same tortfeasor, the resolution of the various cases through repeated trials produces positive informational externalities. When class actions are forbidden, these externalities only benefit to the later plaintiffs (through precedents, jurisprudence...). When they are allowed, the first filer may have an incentive to initiate a class action as far as it enables him to benefit from these externalities, through the sharing of information with later filers. We provide sufficient conditions under which a class action is formed, assuming a perfect discovery process. We also show that when contingent fees are used to reward attorneys’ services, plaintiffs become neutral to the arrival of new information on their case.

The case against lawyers’ contingent fees and the misapplication of principal-agent models

In this paper the case against the principal-agent modeling of most economic transactions is made about liberalizations of professional services that introduced in many European countries schemes of professionals’ remuneration contingent on outcomes—i.e. “contingent fees” for lawyers. If the relationship between the professional and clients is seen according to the principal-agent model, contingency fees can be economically justified. The case is quite different, however, if the situation is seen as one of authority under bounded rationality and unforeseen/asymmetrically gathered events. A game theoretical thoughtexperiment aimed at checking the case for or against using agency models is carried out. It shows that (i) in the case of a self-interested professional, notwithstanding that overall utilitarian efficiency may be safeguarded, contingent fees leads to not respecting the fiduciary obligations (to detriment of Pareto optimality, impartial and loyal treatment of all clients, and the obligation to promote all the clients’ welfare). (ii) In the case of the professional’s willingness to comply with deontology standards—requiring impartial protection of all the clients’ rights and welfare, under a condition of minimal individual rationality—contingent fees lead nevertheless to making useless deontological motivations and to a loss of efficiency in utilitarian sense. A Pareto optimal, impartial, as well as efficient, arrangement aimed at maximizing the total volume of damage compensation is then considered. Nevertheless the main result is that, even if motivations to conform to such principles were available, under a contingent fee contract the professional could not carry out them because of the logic of the incentive contract. Thus, notwithstanding its widespread acceptance in the law and economics literature, agency theory seems not suitable in general for designing efficient and fair contracts and economic institutions.

Regulatory Barriers to Litigation in India

The legal profession in India does not seem to have any significant entry barriers as are prevalent in other sectors in India. Yet litigation fails to attract talented law graduates, except those who have a parental/family background in litigation. Litigation in India is marked by the presence of small and middle-size family-run law firms who employ law graduates as juniors and may fall short of world class corporate culture. On the other hand, it is rare for a fresh law graduate to become an entrepreneur-style practitioner on their own, right after college. This is in contrast with other sectors where graduates with degrees can take a bank loan and can start an enterprise. This paper reviews the regulatory framework of how legal barriers with noble intentions makes the sustainability of new entrants almost impossible in the legal profession and thus discourage new entrants from choosing litigation as a career after college. These barriers, though not entry barriers in a strict sense, are operational barriers and include: a) restrictions on the legal form of a law firm; b) a ban on advertising; c) a ban on charging a contingent fee; d) a ban on moonlighting. The paper also looks at moral hazard associated with self-regulatory bodies viz. the Bar Council of India and the State Bar Councils. Finally, the paper makes a case for reforms in the form of doing away with restrictions to lay down a level-playing field for all practitioners and foster competition.

The Grand Challenge for Forensic Psychiatry

Forensic psychiatrists serve to bridge the divide between medical issues and legal operations. Forensic practice deals with the coexistence of medical, legal, and ethical issues within a sociopolitical and legal framework (Sharma and Sharma, 2006). The areas of forensic practice include evaluation of competency, insanity, child custody, and testament recapacity (Wettstein, 2002). In addition, forensic psychiatrists are also concerned with risk assessment, preventive measures, crisis intervention, and outpatient's treatment (Bluglass, 1981). The demand for forensic psychiatrists has increased since an association was established between a number of psychiatric disorders and legal matters. It has been reported that 15–24% of U.S. prisoners have severe psychiatric disorders (Baillargeon et al., 2009). According to the Bureau of justice nearly over one millions inmates have at least one psychiatric problem. Psychiatric practice is based on therapeutic approach, where as law deals with authorizing discipline. Forensic psychiatrists routinely have to tackle complex ethical dilemmas as they are the link between medicine and law (Arboleda-Florez, 2006). They must have knowledge of general psychiatry, courtroom activity, and legal procedure to offer an expert opinion with a scientific basis (Wettstein, 2002). Forensic experts should be well versed about current technology and various psychological tests used for evaluations. Other ethical concern such as stigmata associated with psychiatric disorders and protection of patient's rights have gained major media attention (Sharma and Sharma, 2006). One example is involvement of a forensic psychiatrist in evaluation of competency in cases of offenders on death row. They must have a limited kind of relationship with their client and should not evaluate their current patients (Wettstein, 2002). Financial arrangements can be of the ethical dilemma for a forensic expert. To improve the objectivity of experts, contingency fees are not allowed between expert and attorney (Wettstein, 2002). To maintain ethical standards, many forensic experts do not accept payment directly from clients. Furthermore, they should keep themselves prepared for cross examination in courtroom. Forensic psychiatrists have a major interest in the drafting and application of mental health legislation, especially on the issues of involuntary commitment. In many instances, a determination of dangerousness is weighed against the need for treatment in the management of mentally ill offenders and issues of legal protections for incompetent persons (Wettstein, 2002). In forensic psychiatry neutrality is demanded from the evaluator. Consequently, such experts may even be implicated in criminalization of mentally ill persons (Ojesjo, 1981). They have an obligation to uphold the ethics of medicine as physicians first and foremost; outcomes would be drastically different if forensic evaluations are usually at the hand of other parties. They bear a heavy ethical burden is placed on them to scrutinize their motives and the motivations and possible final actions of those who hire them for evaluations (Wettstein, 2002). There are numerous ethical issues to be addressed in forensic psychiatry. The future is bright; the development of numerous medications and other approaches for management of mental illness has enhanced the scope of current forensic psychiatry (Gutheil, 2006). The span of forensic psychiatry will likely develop in two areas; trial consultant and juror consultant. The field of forensic psychiatry can benefit greatly from advanced technology, e.g., neuroimaging, MRI of brain (Vloet et al., 2008). It has been shown that dysfunction of frontal cortex and limbic system is associated with antisocial behavior such as criminal and violent behavior (Vloet et al., 2008). Continuous research in areas of neuroscience, physiology, genetics, and chemistry will likely enhance the scope of forensic practice. This discipline can be an integral part of national security in the future. Assessment of behavioral patterns of terrorists as well as domestic criminals may potentially be used to predict criminal acts. Physicians who practice forensic psychiatry now have an obligation to make sure that they remain committed to their clinical base while growing to expand their clinical knowledge.

The Derivative Action and Good Corporate Governance in China: Economic Theories and Legal Rules

Good corporate governance is crucial for the successful transformation of SOEs in China and the long-term success of Chinese economy. To improve corporate governance in China, the top priority is to curb serious managerial misbehavior such as misappropriation and fraud which has not yet been controlled. To achieve this end, market-based mechanisms are ineffectual, because they are not equipped with the ability to remove illegitimate benefits from misbehaving management or impose punishments on them. Only legal liability has this ability and can thus be effective in deterring serious managerial misbehavior. Legal liability comes from both the public and private enforcement of law. While the public enforcement of law produces harsher liabilities, it suffers from various limitations. Public law enforcement is particularly ineffectual in China where an accountable political system has yet to be established and law enforcement is impeded as a result of the dominance of state ownership in listed companies. For these reasons, the private enforcement of law is necessary. Both derivative action and securities class action are devices of private enforcement of law which produce legal liability, but derivative action is indispensable, not just because securities class action is unrealistic in China.To enable derivative action to become a realistic corporate governance tool, appropriate legal rules should be put in place. The traditional common law, which is based on the dichotomy of actionable and non-actionable wrongs, seems irrational, because actually there is no such distinction. The company’s interest is the paramount test of the permissibility of derivative action and this, in turn, is determined by the purpose of company. While the new derivative action in China does not differentiate actionable and non-actionable wrongs, it adopts the strategy of setting a minimum shareholding requirement as the condition for bringing suits. From the experience of continental Europe and the US, such a strategy would ensure that derivative action would not be vigorously pursued in China. The strategy should be changed and an approach enabling derivative action to be decided case by case according to the test of the interests of the company should be adopted. If this strategy is adopted, it might be better to assign the responsibility of assessing a case to the court rather than to the company. The assessment should be based on the probability of success and the potential net recoveries from the case. Another defect of the new derivative action is that it does not mention the issue of litigation funding. Without appropriate funding rules, derivative action would not actually be taken. The American contingent fees are most favorable in terms of facilitating derivative actions and current experience of derivative actions in the US indicates that contingent fees would not necessarily lead to frivolous litigation.