Settlement mill personal injury businesses

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Rational lawyers want to screen out cases with a low probability of obtaining a recovery. The more important contingencies facing lawyers are the uncertainties over the amount of the recovery and amount of investment by the lawyer that will be necessary to obtain the recovery. At the time a lawyer signs up a new contingency fee client, the lawyer typically has some idea of the general size of the case. However, the reality is that the lawyer only knows that a quadriplegia case is probably worth a lot more than a routine soft tissue case. Cases can change, either increasing in value if the lawyer can locate additional insurance coverage or something goes wrong during the client’s treatment, or decreasing in value if the client enjoys an extremely good recovery. In addition, the uncertainties of comparative negligence need to be factored in. How such uncertainties might affect the case depends on the stage at which the case is resolved. Even more problematic for the lawyer is that the opposing party’s decisions regarding how to handle a case largely determine how much time and effort the case will take. The opposing side might immediately offer to tender its insurance policy limits or, alternatively, fight the case up and down the court system.

Herbert M. Kritzer, The Wages of Risk: The Returns of Contingency Fee Legal Practice, 47 DePaul L. Rev. 267 (1998).

Barry changed firms not because of an interest in trial or injury related work, but because the position “paid a higher salary, which I needed. I think I joined his office the day my first child was born.” Indeed, this trial office handled both plaintiffs and defense work. Barry worked for this law firm for seven years developing both plaintiffs’ and defense practices. He left the firm and started a new office only after he “was doing more and more specialized work in personal injury and a lot of lawyers—I probably had about 90% of [my] cases referred from other attorneys—and many of those attorneys were in other litigation in conflict with the office. I found that it was incompatible to have lawyers who referred me work and then have them litigating against other lawyers in the office.”

Today Barry has one of the largest plaintiffs’ personal injury firms in Indiana with more than ten attorneys. Barry’s reputation as a trial attorney with 44 years of experience continues to bring in a steady flow of clients (though the firm has recently begun advertising in the yellow pages). According to Barry and several other plaintiffs’ personal injury attorneys who compete with his firm, their city of 84,000 residents probably could not sustain such a large firm on its own. Barry’s well-established reputation brings in significant amounts of personal injury work from across the state.

The example of Barry highlights the distinctive features of plaintiffs’ personal injury attorneys whose practices are defined by the interaction between geography and substantive specialization. These attorneys have developed techniques for overcoming the limitations of their geographic locations without specializing into high-profile areas such as medical malpractice. Barry’s firm handles general plaintiffs’ personal injury practice that includes cases valued as low as $1000. The firm does not accept medical malpractice cases. By accepting a small number of high-profile cases, Barry exploits his reputation as a trial attorney to bring in clients with less significant injuries. Like many of the attorneys in this market niche, Barry’s management of his reputation and firm is well planned.

More typically, attorneys in this category use mass advertising as a strategy to gain clients beyond the city or county their firms are located in. These attorneys view plaintiffs’ personal injury practices as business enterprises that must be managed for maximum profit. Like Michael, who openly admits that he graduated near the bottom of his law school class, these self-styled “entrepreneurs” are more interested in marketing, firm organization, efficiency and profit than their reputations as trial attorneys. … Today, Michael’s firm dominates the plaintiffs’ personal injury market in his city and he competes for clients with attorneys in Indianapolis. Michael advertises heavily in the Indianapolis television viewing area (which includes his location). He employs three attorneys and ten secretaries in a practice that he describes as “mass production”. Several other attorneys have innovated a step beyond Michael by advertising throughout the state and having branch offices staffed by secretaries in several cities. One such firm employs direct mail solicitations by having staff in each city where they have a branch office collect the daily accident reports from the police. Accident victims are identified from the reports and letters are sent to their home addresses.

Jerry Van Hoy, Markets and Contingency: How Client Markets Influence the Work of Plaintiffs’ Personal Injury Lawyers, 6 Int’l J. Legal Prof. 345, 361-62 (1999).

While not specifically focused on the plaintiffs’ bar per se, Carlin’s study of solo practitioners devoted significant attention to lawyers handling personal injury claims. Carlin distinguishes between what he calls the ‘lower’ and ‘upper’ segments of the solo bar handling personal injury cases. The former drew his (most, if not all, of the lawyers in Carlin’s study were male) clients largely from a neighbourhood or ethnic base, and was most likely to handle personal injury cases in the context of a general practice; lawyers in this lower segment were very concerned about competition for clients. In contrast, the ‘upper’ segments of the solo, personal injury bar tended to be specialists who frequently drew clients through ‘suppliers,’ including referrals from other lawyers; these lawyers were much less concerned about competition for clients. Ross’ study of the settlement of automobile accident claims also found a clear distinction between lawyers who handled these cases as part of a general practice and those who specialised in negligence cases; in his analysis of claims outcome, Ross found that specialists (which he defined in terms of membership in the predecessor to the Association of Trial Lawyers of America) obtained recoveries that on average were considerably higher than those obtained by other lawyers. Rosenthal, in his study of representation in personal injury claims, again found specialists to be more likely (67%) to obtain a ‘good’ result than non-specialists (47%).

Herbert M. Kritzer, The Fracturing Legal Profession: The Case of Plaintiffs’ Personal Injury Lawyers, 8 Int’l. J. Legal Prof. 225, 229 (2001).

A frequent critique of contingency fees is that the interests of lawyers and clients may diverge. Lawyers may want to settle cases too quickly and for lower amounts than a client might prefer, or lawyers may prefer to accept higher risk, taking a case to trial in the hopes of a large verdict while the client would prefer to settle and be assured of compensation. A simple example makes it clear how the former situation might happen. A lawyer handling a case with a maximum payment of $25,000 comes out better by settling the case for $10,000 after ten or twenty hours of work (investigating the claim, collecting documentation, drafting a demand letter, and negotiating a settlement) than by taking the case to trial and winning $25,000 after 100 or 150 hours of work. With the settlement, a lawyer receiving a 25% fee earns $125 to $250 per hour; with the trial, even with a 33% fee, the lawyer earns only $55 to $83 per hour.
The problem arises for two reasons. First, for modest cases, the rational client paying on an hourly fee basis will make very different choices than the rational client paying on a percentage basis. The hourly fee client would want to limit the amount of time the lawyer put into the case and would probably opt to accept a lower gross settlement because the client will obtain a higher net. The percentage fee client does not care about what it costs in terms of lawyer-hours to obtain a result; all the client cares about is maximizing recovery (discounting for risk preference).
The second source of the problem of conflict arises because the client is not well situated to evaluate whether a settlement offer is a good one. How does the client assess an offer? A client could try to locate jury verdict reporters or literature on case valuation and use this to come to an independent estimate of the case value. Alternately, a client could pay another lawyer a fee specifically to evaluate a settlement offer. However, such things virtually never happen. Few clients are willing to bear the expense of an independent evaluation, and relying on published sources would at best provide a sense of the range of values into which the client’s case probably falls. Moreover, lawyers have a variety of ways of manipulating clients’ expectations and assessments.
It is undoubtedly true that most lawyers handling cases on a contingency fee basis are extremely mindful of their own interests as they negotiate settlements. However, this does not mean they are not very concerned about the interests of their clients. The key here is that for the lawyer, it is not the outcome of a single case that typically matters but the outcomes across the set of cases. This means that the lawyer has to be concerned not only about his or her return from current cases but of the prospect of getting future cases. One way to think about this is that the lawyer must take into consideration the entire set of cases currently in the lawyer’s portfolio and what implications a specific case might have both for the current portfolio and for cases that might come into the portfolio later. Consequently, lawyers do not always handle a given case in the manner one would predict of someone who was seeking to profit-maximize on a case-by-case basis. The lawyer must consider both the short-term payoffs from current cases and the long-term reputational issues, both with regard to future clients and future opponents. It was extremely clear during my observation that the three lawyers I observed are very cognizant of their reputations, and the issue of reputation came up repeatedly in my subsequent interviews.
The typical view is that a lawyer must be recognized as someone who would be willing and able to take cases to trial because insurance adjusters and defense attorneys are less inclined to make top-dollar settlement offers to a lawyer with a reputation for wanting to settle quickly. The best way to get quick, good settlements is to have a reputation for being an aggressive trial lawyer—aggressive both at trial and in negotiation. Interestingly, the lawyers who have reputations for being most aggressive in moving toward trial may also be the lawyers who are most able to turn over cases quickly once a client’s medical situation has become clear; if an insurer knows that a lawyer is moving to get a case ready for trial, the insurer has an incentive to get the case settled.
But reputational issues are not just important for settling cases. They are also important for getting clients. First, a reputation for being an effective negotiator and litigator is crucial to obtaining referrals from other lawyers. This is most obvious when a referring lawyer will receive a referral fee; the referring lawyer wants to maximize the referral fee, and this will lead the referrer to consider the receiving lawyer’s reputation. Even when no referral fee is paid, from my observation, lawyers making such referrals are mindful of the expertise and success of the lawyers to whom they make referrals.
Second, the other major source of clients for most contingency fee lawyers is satisfied clients who will refer friends, family members, or coworkers who in the future need a lawyers, or even come back themselves with a new case. It is not helpful to a lawyer’s long-term financial interest to have clients later realize that a coworker or neighbor who had a similar injury received a much larger settlement check. How is this the case for former contingency fee clients who do not have sophisticated knowledge of what cases are worth? Very simply, clients talk about their experiences and compare their experiences with those of their friends. A client who obtained a settlement of $2,000 or $3,000 for a serious injury such as a broken leg is likely to hear things from others that suggest that the injury was substantially undercompensated. Contingency fee lawyers want their clients to leave satisfied with the result the lawyer obtained on their behalf; more importantly, the lawyers want the clients to stay satisfied. A lawyer who settles cases too cheaply may have trouble maintaining the reputation necessary to create the flow of potential clients that is in the lawyer’s longterm interest.

Herbert M. Kritzer, Seven Dogged Myths Concerning Contingency Fees, 80 Wash. U. L.Q. 739 (2002).

The size of the Texas plaintiffs’ bar is hard to know with precision, in part because there is no simple definition ofwhat a plaintiff’s lawyer is. Is it a lawyer who is certified in personal injury trial law by the Texas Board of Legal Specialization? If so, the plaintiffs’ bar will be relatively small–fewer than 1700 in 2000. Is it simply a lawyer who is a member of the Texas Trial Lawyers Association (TTLA) or the Association of Trial Lawyers of America? Is it a lawyer who does only plaintiffs’ work on a contingency fee basis, or is it a lawyer who does any plaintiffs’ work at all?

Stephen Daniels & Joanne Martin, It Was the Best of Times, It Was the Worst of Times: The Precarious Nature of Plaintiffs’ Practice in Texas, 80 Tex. L. Rev. 1781, 1783-84 (2002).

There is a structure and a hierarchy within the plaintiffs’ bar, and the best way in which to describe this structure is to categorize lawyers on the basis of the value of their average contingency fee case. Doing so will not capture everything that is important, such as a lawyer’s reputation for professionalism and integrity, but it does seem to capture the most important indicator in the eyes of plaintiffs’ lawyers of where someone is situated in the hierarchy. For instance, in talking about the unsavory reputation of a well-known Texas plaintiffs’ lawyer with a record of winning big cases, a Houston lawyer said, “He’s a good lawyer …. I don’t know if he chased that airplane or not [getting clients], but if I was on that airplane, I’d want him to be my lawyer. If I walk out of here and get hit by a truck… then I would like to have X take it [the case].”

Stephen Daniels & Joanne Martin, It Was the Best of Times, It Was the Worst of Times: The Precarious Nature of Plaintiffs’ Practice in Texas, 80 Tex. L. Rev. 1781, 1785 (2002).

For most lawyers handling contingency fee work, the real profits come from a very small segment of cases . . . . One lawyer who turned over as many as 200 cases a year told me that two-thirds of his gross fees (and hence his profits) came from perhaps a dozen cases each year; the other cases essentially covered his overhead. This lawyer took large numbers of cases primarily to keep his name out in the community.

Herbert Kritzer, Lawyer Fees and Lawyer Behavior in Litigation: What Does the Empirical Literature Really Say?, 80 Tex. L. Rev. 1943, 1977 (2002).

When the lawyer’s and client’s interests coincide, there can still be issues related to the client’s risk aversion and general fears about going to trial Some analyses of the contingency fee point to situations in which the lawyer wants to go to trial while the client would prefer to accept a settlement involving a substantial compromise, The lawyer’s preference for trial might be the simple economic calculation of a risk- neutral actor; an opponent might offer a $500,000 settlement, when in the lawyer’s estimation there is an 80 percent chance of winning at trial, and the minimum verdict would be $1 million. With a one-third contingency fee, the lawyer is comparing a $166,667 fee from settling to an expected fee of $266,667 If the case goes to trial. If the lawyer expects preparation and trial to require 100 hours of time, the expected effective hourly rate for the marginal time investment is $1,000 per hour. To the lawyer who is genuinely risk-neutral, trial will look advantageous. On the Other hand, for the risk-averse client, a certain payment of $333,333 from the $500,000 settlement may look very attractive when compared to an 60 percent chance of $666,667 (which means there is a 20 percent chance of $0), even though the expected value is $533,334 And beyond risk preference vis-à-vis outcomes, a client may prefer settlement simply to avoid the trauma of the trial experience.

The lawyer may also prefer to go to trial for reputational reasons. The case might be such that it is likely to garner some media attention and get the lawyer’s name before the public. Alternatively, as discussed later in this chapter, the lawyer may feel the need to demonstrate to the opposing party (and hence to future opposing parties) that the lawyer is perfectly willing to take cases to trial, even if that involves “rolling the dice.” Even if a lawyer already has a reputation, both among potential clients and among opposing parties, the lawyer may feel a need to take some percentage of cases to trial to maintain a reputation. Thus, the lawyer may have goals beyond the instant case that have nothing at all to do with the client’s interest.

Herbert M. Kritzer, Risks, Reputations, and Rewards: Contingency Fee Legal Practice in the United States 231-32 (2004)

Ten characteristics help to distinguish settlement mills from more conventional personal injury law firms. Four of these factors are necessary (meaning a law firm that does not exhibit each characteristic cannot be considered a settlement mill), and six represent traits that are probative. Settlement mills necessarily (1) are high-volume personal injury practices that (2) engage in aggressive advertising from which they obtain a high proportion of their clients, (3) epitomize “entrepreneurial legal practices,” and (4) take few—if any—cases to trial. In addition, settlement mills generally (5) charge tiered contingency fees; (6) do not engage in rigorous case screening and thus primarily represent victims with low-dollar claims; (7) do not prioritize meaningful attorney-client interaction;(8) incentivize settlements via mandatory quotas or by offering negotiators awards or fee-based compensation; (9) resolve cases quickly, usually within two-to-eight months of the accident; and (10) rarely file lawsuits.

Nora Freeman Engstrom, Run-of-the-Mill Justice, 22 Geo. J. Legal Ethics 1485, 1491-92 (2009).

Contingency lawyers typically employ a merits screen at the outset, and about half the cases tend to be rejected at this stage. 18 Once past the initial screen (that is, once a case has been determined to have merit), many cases are still rejected. Studies of the plaintiff’s bar show that, past the initial screen, the principal determinants of whether a tort case is worth the lawyer’s time and expense are: (1) the amount of damage the plaintiff suffered; (2) whether there is a “responsible party” who has suffi cient funds to pay those damages; (3) the amount of expense likely to be required to secure a settlement or a judgment; and (4) the amount of time and effort the lawyer is likely to be required to invest, and over what period of time. The fifth factor – how meritorious a judge and jury are likely to see the claim to be – may appear to the outsider to be the most important in the lawyer’s decision to accept or reject a case, but, surprisingly to many, it tends to be less important to the ultimate decision once the case has passed the initial screen. The economic calculation a contingency lawyer undertakes focuses largely on whether the case is economically viable. Even meritorious claims require investment of time and money because the lawyer must assume the defendant will contest the claim.

John T. Nockleby, “Faces of the Tort Pyramid” in Scott L. Cummings ed., The paradox of professionalism : lawyers and the possibility of justice (Cambridge ; New York: Cambridge University Press, 2011) at 97-98.

A plaintiffs’ lawyer builds a practice around the “going rates.” Going rates depend on what particular kinds of cases are worth in a given locale, and jury verdicts play a central role even though they tend to be relatively infrequent. These going rates are well-known to the civil justice system’s regular players and have a powerful effect on how plaintiffs’ lawyers structure their practices and what they do. For example, a Fort Worth-area lawyer said he has stopped taking certain kinds of cases because of a change in the going rate: “With the way juries are now in Tarrant County, it’s gotten to the point if you have a rear-end collision with soft tissue injury, and say less than $500, $1000 of property damages, you can’t even afford to take that case on. The insurance companies have gotten to where they offer $500, $1000.” Similarly, a Houston lawyer said that “with respect to the state of mind of juries in reference to minor cases . . . cases that used to be payable cases are no longer payable cases. Those are all gone . . . I can no longer afford to handle them . .. that was almost a third of the market . .. just little fender-benders.” Perceptions of the going rate can also lead lawyers toward certain kinds of cases. In light of the hostility of juries toward personal injury suits (and as a result the harder stance taken by insurance companies), another lawyer’s small litigation firm started handling commercial cases on a contingency fee basis: “Those are easier cases than plaintiffs’ personal injury cases. . . . We do it on a contingency fee basis. They are easier because of standing up and saying [to a jury] my client has suffered greatly, his knee will never . . . and you have to try to paint the picture, you just write some numbers on a blackboard and say this $4 million … for some reason people don’t think those plaintiffs are scumbags. They don’t think business plaintiffs are scumbags. They have no problem with Southwestern Bell suing Greater Atlantic Bell. They don’t like Alexander Bell and his wife suing for an injury.”

Stephen Daniels & Joanne Martin, Plaintiffs’ Lawyers: Dealing with the Possible But Not Certain, 60 DePaul L. Rev. 337, 348-49 (2011).

Settlement mills, situated on the far end of a continuum of contemporary personal injury practices, are distinctive in many important respects. First, settlement mills advertise more aggressively than other personal injury lawyers, and, unlike other practitioners, the majority or vast majority of their cases come from these advertising efforts. Second, they maintain unusually high claim volumes. While studies suggest that most personal injury attorneys have somewhere between sixty and seventy open files at any one time and serve on the order of 110 clients per year, settlement mill attorneys (or non-attorney negotiators) often triple that—juggling 200 to 300 open files on any given day and serving 300 to 400 clients annually. Third, settlement mills do not function as traditional gatekeepers: They do not expend significant resources vetting cases, and they reportedly accept most would-be litigants that their ads attract. As a consequence, settlement mills’ portfolios tend to consist largely of soft-tissue-injury claims (sprains, strains, contusions, and whiplash) sustained in automobile accidents—cases that, as we will see, most practitioners eschew. Fourth, settlement mills tend not to prioritize meaningful lawyer-client interaction. In his study of Wisconsin contingent fee lawyers, for example, Herbert Kritzer found that face-to-face meetings were relatively rare, but they did bookend a typical case: Clients met with lawyers when the retainer was signed at the beginning of the representation and when the settlement check was delivered at the end. In contrast, clients of settlement mills often meet with lawyers when the settlement check is disbursed—or not at all. Fifth, as compared to conventional counsel, settlement mills tend to delegate more extensively to non-attorney personnel.

Nora Freeman Engstrom, Sunlight and Settlement Mills, 86 N.Y.U. L. Rev. 805, 816-17 (2011).

The conventional wisdom is that plaintiff’s lawyers are paid one-third of what they recover, plus expenses—except when they are paid more. The reality is more complex. … The Rand Institute for Civil Justice published several studies in the 1980s, finding that plaintiffs’ attorneys’ fees ranged from twenty percent in airline crash cases to thirty-three percent in automobile cases to forty percent in asbestos cases. The Federal Trade Commission conducted a survey of plaintiff-side legal fees in ten cities in 1981–1982 and found that contingency fees for personal injury cases settled before trial ranged from thirty-one percent to thirty-seven percent, with a mean of thirty-three percent. Using data obtained from insurers, the Government Accountability Office (“GAO”) studied med mal cases closed in 1984, and found that roughly half (fifty-two percent) had contingency fees ranging from thirty-one to forty percent of indemnity payments.

David A. Hyman, Bernard Black & Charles Silver, The Economics of Plaintiff-Side Personal Injury Practice, 2015 U. Ill. L. Rev. 1563, 1566 (2015).

Professor Herbert Kritzer has conducted several studies of personal injury lawyers Kritzer found that about two-thirds of the lawyers he surveyed used a fixed contingency rate, of which almost ninety percent had a contingency fee of thirty-three percent. The contingency rate for the remaining one-third ranged from twenty-five percent if the case settled before trial, to thirty-three percent if trial was required, to forty to fifty percent if there was an appeal. Garber et al. surveyed plaintiffs’ lawyers on their willingness to accept cases, based on three vignettes. As part of their analysis, they asked respondents what contingency fee rate they used most often. Thirty-three percent used variable rates depending on the level of effort and stage of case resolution; fifty percent charged a flat forty percent; fourteen percent charged a flat one-third; and the remaining three percent charged a flat rate other than forty percent or one-third.

David A. Hyman, Bernard Black & Charles Silver, The Economics of Plaintiff-Side Personal Injury Practice, 2015 U. Ill. L. Rev. 1563, 1566 (2015).

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