The Courts and the Market: An Economic Analysis of Contingent Fees in Class-Action Litigation

COMPENSATION for professional services is uniformly contingent on effective performance in the long run. Simply put, the market eventually rewards success and penalizes failure. And in some professions, payment is contingent on successful performance even at the level of the individual transaction; in contrast to the physician, who will be paid for his efforts even if the patient dies, the real estate broker receives no compensation at all unless the house is sold, and the executive recruiter is not paid unless the desired manager is hired. Compensation in the legal profession takes a number of forms, but payment for representing a tort plaintiff, for example in a personal injury lawsuit, appears to be almost always explicitly contingent upon success.' Typically, the plaintiff will hire a lawyer and agree upon a percentage of the final recovery that will serve as the lawyer's compensation. If the recovery is zero then so, too, is the lawyer's take. The contingent fee arrangement has been studied extensively, in part