Notions of Fairness and Contingent Fees
Law & Contemporary Problems, Vol. 74, No. 1, 2011
32 Pages Posted: 27 Dec 2009 Last revised: 15 Apr 2015
Date Written: December 21, 2009
Notions of fairness play an important role in assessing the validity of transactions. Fairness judgments may refer to various aspects of the transaction; yet their primary object is the adequacy of remuneration: Does each party receives fair value in return for what she gives. One type of transaction whose fairness is constantly and extensively debated is plaintiffs’ hiring of attorneys on a contingent fee (CF) basis, where the fee is calculated as a certain percentage of the recovery.
The four factors determining the effective hourly rate resulting from a CF arrangement are the claimed sum, the probability of recovery, the CF rate, and the number of hours the attorney works on the case. According to our findings, very high CF rates are considered unfair even when they result in a low effective hourly rate. Within the wide range of values we consider, the effect of CF rate on the assessed fairness is considerably greater than the effect of any other variable. At the same time, we found no direct correlation between people’s perceived fairness of CF arrangements and their preferences when facing a choice between CF and other fee arrangements. We thus conjecture that the primary mechanisms through which the prevailing perceptions affect the market have to do with the behavior of attorneys who care about their reputation, and regulators who set caps for CF rates. The resulting “fairness constraint” drives very high CF rates out of the market even in cases where the parties would have found them mutually beneficial.
Keywords: contingent fees, input fairness, output fairness, division fairness, fairness of exchange, fairness constraint, pricing, lawyer's ethics
JEL Classification: D4, K12, K29, K4, K41, L1
Suggested Citation: Suggested Citation