“Skin in the game” and attorney ethics

In the United States, contingent fees for attorneys are regulated and usually prohibited in most criminal and family law matters.  Among the justifications for contingent fees are that they reward success, not attorney billable-hour churning.

In today’s New York Times Adam Liptak discussed Marek v. Lane, a class action case against Facebook involving privacy violations.  The Ninth Circuit approved, 2-1, a settlement that would require Facebook to make a $6.5 million donation to a foundation to be founded by Facebook, and to pay the class action plaintiffs’ attorneys $2.3 million dollars.  As for the class plaintiffs, they would get: nothing.  Not one dime.  The Supreme Court may take up the reasonableness of this class settlement.  Read the scathing quotes from the dissent in the link.

My newest favorite author, Nassim Nicholas Taleb, repeatedly urges that decision makers and experts need to have “skin in the game”, a meaningful downside personally if things don’t go well.  Taleb is a bond trader, economics commentator (if I call him an “economist” I know I will get a C&D letter) and philosopher and he attacks much of the economics establishment as charlatans in part because they aren’t held accountable for their (in Taleb’s view) irresponsible and damaging bad advice.  Taleb has spoken with some favor of the rule in Hammurabi’s Babylonia in which builders of houses that collapse must suffer the sorts of harm, up to and including maiming and death, that befall the houses’ occupants.  While this seems perhaps unspeakably cruel, it does motivate the builder due to his literal skin in the game to take building and design extremely seriously, perhaps preserving generations of life.

In much of Europe, the contingent fee is considered immoral and is prohibited.  From a “skin in the game” standpoint, however, it may be immoral NOT to make lawyers suffer a hit when their advice fails.  We need not execute attorneys for being wrong but it protects the interests of clients if attorneys have a motivation to get it right beyond the mere happiest of current clients.  Attorneys who profit or lose according to their own smart or stupid judgments will be motivated, in a case, in a year, in a career, to be smarter.  Stupidity, like most other things, becomes less common when it is more expensive and the risk of loss has a disciplining effect on the attorney – both in the conduct of the case and in the preparation for many cases over time.

The class action case with no class remedies for the plaintiff pool seems somehow a case in point.  Lacking actual skin in the game, the attorneys allowed themselves to create a remedy in which their own interests and the interests of the counterparty were protected and funded, but their actual clients got nothing.  While we cannot know the psychology of the attorneys, it would seem that the disconnection between them and their client allowed them to reach a settlement where they got millions, a foundation set up by counterparties got millions and their clients got not a dime.  These lawyers had, it seems, no real skin in the game at risk, and now look at what happened.

In criminal defense and family law matters, contingent fees are prohibited; in the former case the fear of defendants pleading guilty when innocent in order to avoid legal fees justifies the prohibition whereas in the latter case the public policy in favor of reconciliation works against the attorney’s motivation for fees from a successful contested property split.  Interestingly, there are post-trial remedies to prevent some forms of attorney misfeasance that don’t exist in, say, car accident or contract disputes.  In criminal cases, habeas corpus, post-conviction relief for ineffective assistance of counsel and coram nobis relief may provide the court some ability, however painfully limited, to review the reasonableness of a sentence or confinement or the effectiveness of legal counsel.  In divorce cases, courts maintain continued jurisdiction over minor children, child support and alimony.  Malpractice actions against attorneys, of course, also put attorney skin in the game to some extent both in contingent fee-permissible cases and in those when contingent fees are prohibited.  The risk of wasting client money, however, is not addressed either by post-conviction relief, motions to modify or malpractice suits; at most there are fee arbitration committees, straight contract/unjust enrichment actions at law and in extreme cases disciplinary actions in some states for patently unreasonable fees.

In sum, the principle of “skin in the game” is easier to enforce when the definition of the “game” is simpler, purely financial and does not implicate major non-financial paramount equities.  Since law often deals with complex desired remedies involving non-financial concerns, the contingent fee is in some cases unnecessary, insufficient or outright contraindicated as a way to make sure that attorneys have “skin in the game” in the effects of their good or bad professional judgments, practices or decisions.

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