Contingency Fee Limits
It is not surprising that trial attorneys want to perpetuate the current legal system and are the most vigorous opponents of medical liability reform. They are the principal benefactors of the system.
Contingent fees
Plaintiff attorneys typically charge on a contingency fee basis in personal injury cases. The standard contingency fee is one-third of the award or settlement. Some attorneys take a higher percentage. A 40 percent or higher contingency fee is not uncommon.
For example, if a medical liability case is settled for $1 million, the plaintiff attorneys often take at least 40 percent or $400,000 plus reimbursement for their expenses—leaving less than 60 percent for the injured plaintiff to cover the medical and other losses that supposedly justified the award.
Only 46 percent of claim-associated payments made by medical liability carriers go to plaintiffs. The remaining 54 percent is needed to pay plaintiff and defense counsel and other litigation expenses.
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Criticisms of attorney contingency fees The trial bar contends that contingency fee arrangements are essential to provide plaintiffs with the “key to the court house.” However, unregulated contingent fees can lead to abuses and unjust fees [
1].
- Attorneys typically charge their standard contingency fee—even when the client’s right to a reasonable recovery is clear and no “premium” is warranted—to compensate the attorney for assuming the risk.
- Contingent fees often result in excessive fees when converted to hourly fees. (Pro-contingency fee studies are unscientific and fail to recognize that successful contingent fee attorneys generally do not participate in bar income surveys.)
- The windfall to the attorney is particularly evident in high verdict cases. For example, under a 40 percent fee arrangement, a $750,000 verdict yields a $300,000 fee, while a $3 million dollar verdict yields a $1.2 million fee ($900,000 more)—even though the risk incurred and time expended by the attorney in each case generally will not substantially differ.
- Contingent fees can cause attorneys to encourage their clients to rack up their "medicals" to increase the size of the award or settlement. The higher the award or settlement, the higher the fee generated for the attorney.
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Legality of contingency fees in Pennsylvania Despite the inherent problems with contingency fees, Pennsylvania attorneys can charge these fees in personal injury actions and there is no meaningful limit on the contingent fee that they can collect. The Pennsylvania courts generally do not even review the contingent fees charged by attorneys for reasonableness.
The Pennsylvania Rules of Professional Conduct, issued by the Pennsylvania Supreme Court, allow contingent fees, except in divorce and criminal cases [
2]. The attorney rules do not cap the percentage that an attorney can charge. Instead, the rules merely provide that the fee cannot be excessive and list general criteria for evaluation of the reasonableness of a fee.
There are some limited situations in which attorney contingency fees are capped or subject to review under Pennsylvania law:
- Minors—The Pennsylvania Rules of Civil Procedure require that the court approve settlements involving a minor, including the allocation to the minor’s attorney. The court can reduce the attorney's allocation despite the terms of the fee agreement [3].
- Workers’ Compensation—The Workers’ Compensation Law generally requires that the fee paid to a claimant's attorney for obtaining an award or settlement be approved by the presiding officer for the hearing and limits the fee that the attorney may collect to 20 percent of the award or settlement unless the presiding officer approves a higher fee [4].
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Invalidation of Act 111 caps on attorney fees
In 1975, the Pennsylvania legislature capped the contingency fees that attorneys could collect in medical liability cases as part of the tort reforms adopted in Act 111. However, the courts subsequently invalidated the Act 111 attorney fee caps.
Act 111 created a mandatory arbitration system for medical malpractice cases and capped the amount of the arbitration award that could be allocated to the plaintiff's attorney to:
- 30 percent of the first $100,000
- 25 percent of the second $100,000, and
- 20 percent of the balance [5].
No provision was made for court approved exceptions.
The Pennsylvania Commonwealth Court struck down the Act 111 limits as unconstitutional—holding that the caps “infringed upon the exclusive power of the courts of this Commonwealth to govern the activities of attorneys.” The Pennsylvania Supreme Court affirmed that decision, but on other grounds [
6].
In an earlier case, the Supreme Court had struck down the mandatory arbitration system as unconstitutional. The Court held that its earlier decision also invalidated all related matters, including the attorney fee caps, because the other reforms were not severable from the arbitration system.
While the Supreme Court decision left open the question as to whether attorney fee caps would be constitutional in Pennsylvania, the trial bar is likely to challenge any caps adopted in the future, on the constitutional separation of powers grounds cited in the Commonwealth Court opinion.
However, the Pennsylvania Medical Society believes that our proposal could withstand constitutional scrutiny. In contrast to the Act 111 restriction, our proposal leaves the ultimate decision on the appropriate fee to the court.
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Caps on attorney fees in other states and under federal law
At least 15 states have limited the fees that attorneys can charge in medical professional liability cases—by establishing either sliding scale limits, such as in Act 111, or a maximum fee. Several other states require judicial approval, or provide for other judicial review, of contingent fees in medical malpractice cases.
Federal law also caps attorney contingency fees in certain actions governed by federal law.
For example:
- Social Security—Federal law generally caps the fee that attorneys can charge for obtaining social security benefits for a claimant at 25 percent of the award [7].
- Federal Tort Claims Act (FTCA)—The FTCA governs tort actions against the federal government. It limits the fee that attorneys can collect for obtaining a recovery under FTCA to 20 percent of the award if the claim is resolved administratively and 25 percent of the award if the claim is resolved in a judicial proceeding [8].
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Endnotes: [1] Lester Brickman, ABA Regulation of Contingency Fees: Money Talks, Ethics Walk, 65 Fordham L. Rev. 247 (October 1996); Testimony of Lester Brickman before the Subcommittee on Telecommunications, Trade, and Commerce Committee of the House of Representative Hearings on Liability Reform (April 30, 1997); see also Michael Horowitz, Making Ethics Real, Making Ethics Work: A Proposal for Contingency Fee Reform, 44 Emory L. J. 173 (Winter 1995).
[2] Pa. R. Prof. Cond., No. 1.5.
[3] Pa. R. Civ. Proc., No. 2039.
[4] 77 P.S. §998.
[5] 40 P.S. §2301.604, repealed by Act of Nov. 26, 1996, P.L. 776, No. 135.
[6] Heller v. Franskston, 464 A.2d 581 (Pa. Cmwlth. 1983), affirmed, 475 A.2d 1291 (Pa. 1984).
[7] 42 U.S.C. §406; 42 C.F.R. §410.686a et seq.
[8] 28 U.S.C. §2671 et seq.
Last Updated: 8/12/2008