Measure Takes Direct Aim at Contingency Fees of Lawyers

Unlike the other four insurance-related initiatives on the Nov. 8 ballot, Proposition 106 is short and to the point.

The one-page measure sponsored by the insurance industry would sharply limit lawyers’ contingency fees, thus altering the system under which a client who cannot afford an attorney on a pay-as-you-go basis can instead retain him or her for no initial fee and pay only if a judgment or settlement is won.

At present, the fees of personal injury trial attorneys often run 33% to 40%, meaning that on a $100,000 award, the fee would be $33,000 to $40,000, or on a $1-million award, $330,000 to $400,000.

Under Proposition 106, the fee on a $100,000 award could be no more than $20,000 and on a $1 million award, no more than $110,000. And even those limits could be lowered by the courts if either of the parties moved for a hearing on doing so.

The limits would apply to all tort claims, not just auto accident cases but product liability and other kinds of claims made on a contingency-fee basis.

Before calculating the fee, the attorney would be permitted to collect off the top certain costs of pursuing the case--including hiring of medical and other experts, filing fees and charges for deposition books. Office overhead costs and costs of the client’s medical care could not be deducted.

Proposition 106 opponents see it as an act of pure vengeance against attorneys by the insurance companies. Some even suggest it could backfire, touching off a chain reaction of initiative campaigns to limit fees collected by others, including insurance agents, doctors and realtors.

The insurance industry campaign says the effect of Proposition 106 will be to “reform our legal system by directing more money to those who need it most--accident victims and other wronged claimants,” taking it away from lawyers who, it says, are making “exorbitant profits.”

But opponents of the measure--mainly personal injury lawyers and consumer advocates--contend that its real effect will be to deprive victims of adequate representation. They say the state’s trial lawyers will move to other fields and many people with good claims but no means to pay hourly fees will not be able to sue, because they will not be able to find competent attorneys.

Besides, they point out, Proposition 106 limits the fees of the attorneys who represent those suing insurance companies, but does nothing to limit the fees of the attorneys who defend insurance companies, always on a pay-as-you-go basis. This, it is alleged, will create an unbalanced situation of better representation for the insurers than for the claimants.

Atty. Gen. John K. Van de Kamp, speaking last month to a State Bar Assn. convention, termed Proposition 106 “a ploy to gain the advantage over people who wish to make accident claims against insurers. Should it pass, many victims will be forced to drop valid claims simply because they cannot find attorneys to handle their cases. And even when attorneys can be found, their budgets and their effectiveness will be sharply limited compared to their opponents. In either case, the insurance companies are sure to profit.”

A tacit admission that the insurers would profit is found in the industry campaign’s statement that “contingency fees encourage lawsuits” and its suggestion that there will be fewer such suits if the fees are limited.

But unlike the industry’s Proposition 104, the no-fault initiative, the insurers are offering no quid pro quo--no promise of lower insurance rates--in exchange for the savings they anticipate for themselves with the passage of Proposition 106.

Originally, the insurers who drafted the measure indicated they did not intend to actually push it to a popular vote.

When it was disclosed last winter that the initiative would be circulated, an industry spokesman depicted it simply as a negotiating tool in talks that were then under way with the California Trial Lawyers Assn. to try to avert any initiatives at all.

But when the talks broke down and the initiatives being circulated by the various sides were all filed, the insurers decided to go ahead with what became Proposition 106 as well.

There are those on both sides of the insurance battle, however, who believe that Proposition 106 presents voters with a less than satisfactory choice--either pass a very sharp contingency fee limitation or no limitation whatsoever.

For example, Van de Kamp, who has sided with the trial lawyers, told the State Bar that the present contingency fee system “is not without faults. Some percentages contracted for are clearly excessive, given the time and effort required.” And he said that “reforms” might be in order.

“Reasonable caps on the lawyer’s percentage of the recovery and greater authority for the courts to review fee arrangements are two which come to mind,” he said.

On the insurers’ side, Blair Childs, executive director of the American Tort Reform Assn. and a backer of Proposition 106, said in an interview that its fee limitations are stricter than “the ones we recommend.” He said his organization supports fee limits “a little bit closer” to those already adopted by California for medical malpractice cases.

These limits are 40% of the first $50,000 of a judgment or settlement, one-third of the next $50,000, 25% of the next $500,000 and 15% of anything above $600,000.

Maximum Fees

Under these limits, the lawyer gets a maximum fee of $36,667 on $100,000, instead of the $20,000 called for under Proposition 106, and $221,667 on $1 million, instead of the $110,000 under 106.

One justification trial lawyers cite for relatively high fees on contingency cases is that they get nothing from clients when they lose, so to a great extent the winners are subsidizing the losers and allowing the contingency fee system to work.

Dissatisfaction with the terms of Proposition 106 on the insurer side is reflected in the fact that two leading sellers, State Farm and the Automobile Club of Southern California, have decided not to support the measure. And one of the leading legislative supporters of the industry in the Proposition 104 no-fault campaign, state Sen. Ed Davis (R-Valencia) is opposing Proposition 106.

Some trial lawyers have suggested that Proposition 106 would put an end to all contingency-fee practice in California.

Al Schallau, the Rolling Hills trial attorney who has formed a “No on Proposition 106 Committee,” for instance, has suggested that virtually all of the 1,000 attorneys most active in handling such cases would quit doing so if Proposition 106 passes.

“For them it would be like boxing in handcuffs,” Schallau wrote in an analysis of the measure. “If Proposition 106 passes, those career plaintiffs trial lawyers will do one of three things: (1) Retire from the practice of law; or (2) Move to other states; or (3) Quit taking cases on contingent fees and require cash retainers and cost deposits.”

Claremont attorney Herb Hafif, heading another “No on 106” committee, has declared: “There will not be a serious contingency litigation firm able to practice in the state of California. That’s not a prediction, it’s just a fact. A law firm cannot practice for a smaller percentage than a waitress gets for a tip.”

Some other attorneys, however, are not so categorical.

Robert N. Stone, president of the Los Angeles Chapter of the American Board of Trial Advocates, said, for example, that he felt the Proposition 106 limits would “discourage seasoned, experienced experts” from continuing to handle contingency fee cases, but he predicted that “marginal” attorneys, those less experienced, younger, and willing to work for lower fees, would still be available to undertake such cases.

May Be More Selective

Some other attorneys, who are not trial lawyers, have suggested that the lower fees may simply have the result of making the trial attorneys pursuing personal injury cases much more selective in the cases they are willing to take on a contingency basis.

This, they say, may be all to the good. There appears to be a feeling among quite a few non-trial lawyers that the trial lawyers have contributed substantially to popular feeling against lawyers.

The official insurance industry position is that contingency practice will continue to exist, although on a smaller scale.

“California has more than 106,000 lawyers--one out of seven nationwide,” the industry campaign office stated recently. “And their ranks continue to swell. The number of lawyers licensed to practice in Los Angeles County has multiplied 2 1/2 times since 1970 and has increased by 35% since 1980! No one will have trouble finding a lawyer.”

Proposition 106 would be preempted, even if it got a majority, if Proposition 100, supported by the California Trial Lawyers Assn. and Van de Kamp, got more votes than the contingency-fee measure. But recently, with Proposition 100 faring poorly in independent polls, it has seemed more likely that the 106 measure could only be blocked by denying it a majority vote.

Accordingly, both the lawyers’ campaign organization and at least three independent committees opposed to Proposition 106, have stepped up advertisements against it, and it has become a major battleground in the insurance initiative wars.

Consumer advocate Ralph Nader, a foe of Proposition 106, recently warned that its passage would open a “Pandora’s box” of initiatives to limit the fees collected by doctors, insurance agents and others.

And Schallau contends that its approval could set a precedent for efforts by an industry to eliminate economic competition. The hypothetical example he gives is an effort by television stations sponsoring an initiative to limit the price of newspapers and the salaries of their editors and reporters.

PROVISIONS OF THE INSURANCE MEASURES

PROPOSITION 106: ATTORNEY FEES LIMIT

Main Sponsor: The insurance industry.

Other Supporters: Assn. for California Tort Reform, California and Los Angeles chambers of commerce, California Manufacturing Assn., California Taxpayers Assn., state Sen. Robert Beverly (R-Manhattan Beach) and four other legislators.

Opponents: California Trial Lawyers Assn., Consumers Union, consumer advocate Ralph Nader, Atty. Gen. John K. Van de Kamp, Los Angeles Mayor Tom Bradley, Assembly Speaker Willie Brown (D-San Francisco) and 11 other legislators, Los Angeles County Bar Assn., Los Angeles County AFL-CIO, California Peace Officers Assn.

Key Provisions of Proposition 106:

Limit on Lawyers Contingency Fees. No attorney would be permitted to contract for or collect a contingency fee in excess of 25% of the first $50,000 recovered, 15% of the next $50,000, or 10% of anything recovered over $100,000.

Application of Limits. The limits would pertain to all recoveries from settlements, arbitration or judgments.

Court Reviews. Courts could, on their own motion or on the motion of either party, review the contingency fee arrangement and order a fee less than the prescribed limits, but not more.

Deduction of Attorney’s Costs. Disbursements or costs incurred in connection with the prosecution or settlement of claims could be deducted from the amount recovered and remitted to the attorney prior to calculating the fee. Costs of medical care and the attorney’s office-overhead costs would not be deductible.

Amendments. Provisions of the initiative could be amended only by votes of two-thirds of the membership of each house of the Legislature or by a vote of the electorate.