The Market for Contingent Fee-Financed Tort Litigation: Is It Price Competitive?

Abstract:     
Tort liability has undergone an enormous expansion in the past 40 years. So too has the effective hourly rate obtained by plaintiff lawyers which has increased well over 1000% in that time frame (adjusted for inflation). That the enormous increases in effective hourly rates parallel the enormous expansion in tort liability raises a number of issues. In this article, I examine one of them: whether the market for contingent fee-financing of tort litigation is price competitive. To do so, I examine certain indicia of a noncompetitive market including the fact of uniform pricing, the absence of economic justification for uniform pricing such as reductions in agency costs or transactional costs, inelasticity of the price in light of highly variable production costs and the absence of price advertising. I then examine factors which inhibit the emergence of a price competitive market including asymmetrical knowledge, the utility of uniform pricing in misleading consumers as to risk, and the signaling function of uniform pricing. I then examine the reasons for the persistence of uniform pricing in the face of the predictions of economists applying standard economic theory that some lawyers would undercut standard pricing thereby generating competitive behavior that would more closely align pricing with risk and the variable cost of producing the service. I attribute the persistence of uniform pricing to market failures and analyze the reasons for such failures. Finally, I examine the actions of the bar designed to prevent a competitive market from emerging. These actions include the maintenance of barriers to entry into the tort claiming market, prohibitions against the outright purchase of tort claims and adoption of rules of ethics effectively prohibiting price competition including prohibitions against providing financial assistance to clients and brokerage of lawyers' services for profit.

Accepted Paper Series