Friday, April 1, 2016

The Fallacy of the Labor Value Matrix - Contingency Fees

I start with the assumption that a "lawyer's time and advice are his stock in trade."  Abraham Lincoln.  Lincoln identified two components that a lawyer sells:  time; and advice.  They represent two different commodities that do not share a correlation.  The problem comes in the value of time spent by a lawyer.

Time does not Determine Value

The value of services provided to a client does not depend on the amount of time that a lawyer spends on an endeavor.  Rather, the time that an endeavor requires may determine that the value conferred is not worth the expense.  Time does not correlate to value.

Time correlates to complexity or lack of skill of the practitioner.  The more complex a matter, the more time it will require.  That provides a direct correlation between complexity and time.  The more experienced and adept the lawyer, the less time the matter will require.  That provides an inverse correlation between skill and time.  Neither implicates the value conferred.

In Burlington v. Dague, the Court observed that it had held in the lodestar (reasonable time multiplied by a reasonable hourly rate) had "become the guiding light of our fee-shifting jurisprudence."  Dauge relied on Pennsylvania v. Delaware Valley Citizens' Council for Clean AirThe Court did not hold that a lodestar represented the best measure for assessing the value conferred on the client.  Rather, the Court consistently holds that the lodestar is the beacon by which to shift fees from the loser to the winner in cases where the statute shifts fees.  The lodestar does not implicate value.

Value has Intrinsic Measurement

A client walks in with a contract proposal from a potential customer.  The contract has the potential of making the client $1,000.  The lawyer agrees to look over the contract at $300 per hour with an estimated completion time of two hours.  Is it worth the client's expense to hire the lawyer for $600 on the assumption that the deal could make $1,000 later?  Probably not.  The value of the services anticipated absorbs most of the value in expectation.

Same situation but the client anticipates making $1 million.  The lawyer agrees to look over the contract proposal at $300 per hour and anticipates that the project will take 33.3 hours of time.  The client assesses the $10,000 anticipated charges against the $1 million in anticipated net income.  Same type of services but a much higher estimated cost but the client sees the value in the cost of the services as 1% of the anticipated benefit.

In neither situation does the amount of time dictate the value to the client.  The value is in the deal, not in the ancillary cost of the services provided.  In the Dague and Delaware Valley scenarios, the client opts to retain the services of the lawyer, value be damned, because someone else is going to have to pay the bill.

The idea that labor determines or influences value has its roots in ancient civilization.  David Ricardo, Karl Marx, and others advocated that labor determines or influences value.  But the person digging a ditch for drainage and the person digging the ditch to extract gold from the hill have the same effort involved but the prospector provides more value and will receive more compensation -- if they find gold -- than the ditch digger providing drainage.  The property owner assesses value of the ditch and makes a decision to excavate based on the exchange value of the services versus the change in the property.  The prospector speculates on the gold market and the chance of finding more gold.

Time does not determine value.  Rather, value determines whether to invest time.  Scott Turow makes a powerful pitch that The Billable Hour Must Die.  The time equals value of services model encourages investing more time on cases or issues that don't warrant more time. 

Contingent Fee Rests on Value

Contingency fees are common in the United States.  They open the doors of the courthouse to those that cannot afford to pay for legal services on an hourly basis by exchanging part of the value of the claim for the lawyer's time and advice.  No reasonable lawyer would exchange time and advice for a claim that had little or no value (absent the market-distorting impact of fee shifting).  The presence of time and advice from lawyers depends on the presence of value.  The time and advice do not create the value but arise because of the value.

There are several arenas where the lawyer and the client may not take a joint interest in the value of the services provided.  ABA Model Rule 1.5(d) provides
(d) A lawyer shall not enter into an arrangement for, charge, or collect:
(1) any fee in a domestic relations matter, the payment or amount of which is contingent upon the securing of a divorce or upon the amount of alimony or support, or property settlement in lieu thereof; or
(2) a contingent fee for representing a defendant in a criminal case.
Outside of those identified areas of law, contingency fees are generally ethical under the ABA Model Rules. 

The contingency model tracks value and makes the lawyer a partner in the outcome of the claim.  The lawyer stops working on claims that have no perceivable merit because of the improbability of receiving value in the end.  Lawyers will take cases that have perceived value assessing the time expected to be invested against that eventual outcome.  Again, time does not create or transfer value but operates as a lever counseling for or against cases with high time expectations and low value.  Conversely, time counsels in favor of claims that have relatively low time expectations and relatively high value. 

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