Attorney advertising and the contingency fee cost paradox.

Author:Engstrom, Nora Freeman
Position:IV. The Paradox: Personal Injury Advertisers Appear to Buck Economic Predictions through Conclusion, with footnotes, p. 667-695
 
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  1. THE PARADOX: PERSONAL INJURY ADVERTISERS APPEAR TO BUCK ECONOMIC PREDICTIONS

    To this point, we have considered theoretical explanations for why advertising might reduce prices, and we have also reviewed a number of studies that, with a couple exceptions, appear to confirm the theory works. We have also seen that legal clinics, the first and most aggressive advertisers, did appear to charge reduced prices for routine legal services, just as theory would dictate and experience from other markets might predict. (185) But, we have also seen that, since the late 1980s or early 1990s, personal injury lawyers have supplanted legal clinics as the biggest attorney advertisers, by far. (186)

    Having laid that factual foundation, we can confront the puzzle this Article exposes and explores: though advertisers typically charge less than non-advertisers, there is no evidence that advertising personal injury lawyers charge less, on a percentage basis, than their non-advertising counterparts. Nor is there evidence that, despite the swell of personal injury attorney advertising, contingency fees--the near-uniform method of payment for PI services (187)--have dropped over the past four decades. (188) True, contending that attorney ads haven't reduced contingency fees is perilous because data here are notoriously spotty. There is no requirement that attorneys publicly report the fees they charge, and there have been few systematic studies. (189) But fragmentary evidence suggests that, if anything, advertising PI lawyers charge higher contingency fees, on a percentage basis, than non-advertising PI lawyers, and that, with some notable exceptions, (190) contingency fees for legal services are--and have long remained--sticky around 33%. (191)

    In an ideal world one could directly test assertions about promotional activity's effect on contingency fees. One could, for instance, compile copious data from a representative group of PI specialists and specify a regression model, regressing fees (whether by contingency fee percentage charged or effective hourly rate realized (192)) on an indicator variable set to one if the firm advertised and zero otherwise along with a range of independent variables that theory and evidence suggest will impact fees or are logically necessary controls, including firm size, attorney experience, subspecialties within PI, and so forth. Better still, one could further refine the model to account for a firm's advertising intensity, as a single Yellow Pages ad and blanket TV coverage might generate very different effects. While even such a sophisticated research design would fall considerably short of a causal model, it would capture the correlation (or relationship) between advertisements aired and fees charged. (193) Unfortunately, though, that data is not currently available and, without it, I am left to rely on either dated or descriptive information, meaning that conclusions are necessarily tentative.

    Three prime sources of data inform the study of the relationship between contingency fees and attorney advertising. The most systematic evidence ever collected, by far, was compiled by the staff of the FTC. As noted, that study found that, unlike for all other specialties, in the three out of seventeen cities with statistically significant results, personal injury advertisers charged higher contingency fees than their non-advertising counterparts. (194)

    Herbert Kritzer's empirical work also sheds light on this question. In a survey of Wisconsin contingency fee practitioners, he found that lawyers in firms that employ media or direct mail advertising earn higher mean and median effective hourly rates, as compared to non-advertisers. (195) Specifically, he found that advertisers earn mean effective hourly rates of $326, compared to $220 for non-advertisers, and median effective hourly rates of $182, compared to $122 for non-advertisers. (196) When weighted to adjust the sample to the Wisconsin population, the difference becomes more stark. Advertisers earned a mean of $513, as compared to $269, and a median of $182, as compared to $165. (197) This study was not confined to PI practitioners, and it did not, of course, speak directly to the precise contingency fee percentage advertising lawyers charge, but it is at least suggestive that today's advertising lawyers are not cutting fees to the bone.

    Third, my own work exploring high-volume, heavy-advertising personal injury law firms, which I have labeled "settlement mills," provides some additional, albeit anecdotal, support. When it comes to fees, all of the settlement mills I've so far studied charge a "tiered" or "graduated" contingency fee, which is a fee that escalates at pre-ordained intervals. (198) This reliance on tiered fees is itself unusual; Kritzer's Wisconsin data, for example, reveal that tiered fees are utilized by only a minority of practitioners. (199) Even more unusual, though, when one compares settlement mills' tiered fees to the tiered fees of other personal injury lawyers, it appears that settlement mills both start with a higher contingency fee percentage and also trigger the escalator earlier in the litigation process. That is, while Kritzer found that Wisconsin firms employing tiered fees typically started at a fee of 25% and increased the fee to one-third only after completing "substantial trial preparation," all settlement mills in my (admittedly small and unscientifically drawn) sample started with a contingency fee of at least 33% (and sometimes 40%) and increased the fee when suit was merely filed. (200) Furthermore, settlement mills charge what appear to be higher-than-average fees even though, as compared to most personal injury practitioners, they handle a higher volume of cases (which should provide various economies of scale), spend comparatively little time and effort on the cases they do resolve (which should lower the cost of inputs), delegate more tasks to paraprofessionals (which should also reduce inputs), and incur very little risk, since the vast majority of settlement mill cases result in some recovery. (201)

    Given that the data we have is highly imperfect, one cannot say for sure that PI advertisers charge more than PI non-advertisers. At the same time, however, the opposite claim--made so often, so confidently, and so consequentially in the past--is left wanting for support.

  2. CONFRONTING THE PARADOX

    This final Part attempts to unravel the paradox identified above. Assuming the FTC study is right, why might personal injury lawyers buck most economic predictions? I start by analyzing four potential explanations I consider to be somewhat implausible. These explanations are: (1) advertising PI lawyers are of particularly high quality; (2) advertising lawyers refer cases to other lawyers at especially high rates, and higher fees are needed to facilitate attorney referrals; (3) collusion within the PI bar keeps prices high and uniform; and (4) advertising lawyers handle particularly small and/or risky cases, and a higher fee is needed to compensate for these cases' lower expected value.

    With those explanations considered and largely discarded, in Subpart B, I consider explanations I find more convincing. These more plausible explanations draw heavily on literature from the fields of behavioral economics and cognitive psychology, train a careful eye on the unique characteristics of the PI/contingency fee marketplace, and contrast the PI/contingency fee marketplace with the legal clinic context, discussed in some detail above. Specifically, I suggest that it is predictable that advertising will fail to lower prices when: (1) there is very little price advertising; (2) quality is vitally important yet impossible to assess, and, to make matters worse, some consumers incorrectly believe that advertising and quality go hand in hand; and (3) payment of attorneys' fees is discounted in consumers' minds because it is uncertain (given contingency fees' no-win, no-pay feature) and, even if fees are to be paid, fees are deducted from recoveries long after attorney retention.

    1. Less Plausible Explanations

      1. Advertising personal injury lawyers are of higher quality?

        The first possibility is that personal injury advertisers do charge higher fees, on a percentage basis, than non-advertisers--but only because advertisers actually provide a superior service. If the representation you get is better with an advertising lawyer, it only makes sense to pay proportionally more. (202)

        Why might advertising lawyers be genuinely superior to non-advertisers? There are two prime possibilities. First, advertising lawyers tend to specialize in a specific area of practice, which might permit those lawyers to become more expert in that field. (203) Second, as some economists point out, advertising is a source of "brand name capital." Advertising, and especially television advertising, is expensive, and it amounts to a sunk cost; it has no value if the lawyer's practice should fail. Given that investment, holding all else equal, advertisers may be especially dependent on repeat purchase. (204) Given this heavy reliance on repeat purchase, as economist Steven Cox has stated in the attorney-advertising context, "advertisers will tend to offer brands (products or services) of higher quality" than their non-advertising counterparts. (205) It only makes sense for quality providers to invest in brand name capital; ergo, only quality providers will advertise.

        Analyzing these two possibilities, the specialist argument is initially plausible. H. Laurence Ross, for example, has compared personal injury recoveries obtained by specialists to the recoveries obtained by nonspecialists and found that the former obtain substantially more. (206) Furthermore, another (albeit dated) study has found, in the PI context, that specialists tended to charge higher contingency fees than nonspecialists, on a percentage basis. (207) But Cox's "brand name capital"...

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