TO THIS POINT, I HAVE ARGUED THAT TORT LAWYERS USE anticompetitive practices and ethical rules to obtain unearned profits. In this chapter, I explain how contingency fees affect lawyers' behavior. In Chapter 8, I shift my focus from the atomistic level to a broader examination of the effects of contingency fees on our civil justice system. Some of these effects contribute to public welfare, but others are perverse and diminish public welfare.

Contingency fees generally align the interests of lawyers with the interests of their clients because the size of the lawyer's fee depends on the amount of the client's recovery. Nonetheless, contingency fees may also induce lawyers to recommend that clients accept inferior settlement offers when the additional investment of time required to raise the offer would result in diminishing effective hourly returns. This reflects the fact that a contingency fee lawyer, like any entrepreneurial investor, tailors her effort to the size of the expected reward. Thus, a contingency fee lawyer who will earn $100,000 if she prevails and nothing if she loses will, in most cases, expend proportionately more effort than a lawyer who will only earn $10,000 if she prevails. Raise the stakes from $100,000 to $1 million, however, and it is unlikely that the lawyer's effort will continue to increase proportionately with the increased stake. When stakes reach $10 million, the additional effort expended will likely be considerably less than ten times the effort when the stakes were $1million.