The Ethics of Contingency-Fee Arrangements

Many municipal ethics codes have a provision similar to this one:

Contingent Fees
No official or employee may retain, or be retained by, anyone to solicit or secure a contract with the town upon an agreement or understanding that includes a commission, percentage, brokerage, or contingent fee, except with respect to attorneys hired to represent the town on a common contingency fee basis.

I had never thought twice about the exception for attorneys who work on a contingency fee basis until I read Adam Liptak's column in today's New York Times. Of course, you have to be able to hire lawyers on a contingency fee basis, because that's the way they work much of the time. There's no ethical problem here.

Liptak shows otherwise, using examples at the state level. The basic question is, Is the legislative body determining what is in the public interest? When a lawyer is hired on an hourly basis, a determination is made that it is worth risking a certain range of tax dollars to possibly get a particular recovery. When a lawyer is hired on a contingency basis, no tax dollars are risked and, therefore, there needs to be no public discussion of the risks and rewards.

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But two things are given away: a sizable portion of the possible recovery, and control over the litigation. In addition, it is difficult to have competitive bidding when costs are irrelevant; therefore, hiring a lawyer on a contingency basis is an opportunity to reward supporters and business associates. (On the other hand, legal contracts are rarely competitively bid; lawyers are often excepted from this rule, as well.)

However, as most people cannot afford to pay hourly legal rates when they have been injured, municipalities may not be able to afford a suit on any other than a contingency basis. Or they may determine it is not in the public interest to hire a lawyer on a hourly basis, considering other uses of the money.

Contingency-fee arrangements have been struck down by courts, for example, one made by the Louisiana Attorney General in an environmental case (1997). But such arrangements have also been upheld, for example, with respect to a tobacco suit filed by the State of Maryland (1998).

My guess is that major contingency-fee arrangements rarely occur in any but the larger municipalities. The norm is probably collection contracts. But the potential for ethical problems should be recognized when putting together an ethics code, as well as when considering any contingency-fee arrangement.