THE CONTINGENCY FEE IS THE ENGINE THAT DRIVES OUR tort system, including personal injury and class action litigation. Contingency fees provide the incentives for lawyers to represent tort claimants and earn a return on their investment of time and capital. Those who write about contingency fees focus on clients' incentives to pursue claims. A claimant's decision to sue, they say, is based in large measure on the expected returns, net of legal fees, and other costs. Based on this presumption, these scholars calculate how varying incentives affect clients' behavior. This emphasis on clients' incentives is misplaced. For the most part, it is lawyers' incentives – not clients' – that matter. At any moment, thousands of would-be clients are seeking representation. Lawyers, however, will only accept a fraction of these claims. A lawyer decides whether to accept a case based on its potential profitability – a function of the litigation risk, the anticipated recovery if the case is successful, and the amount of time and capital that the lawyer will have to invest.

There is no widely accepted measure of the profitability of tort litigation. Rather than wrestle with that formidable task, I indirectly measure profitability by calculating changes in lawyers' “effective hourly rates.” I use this term to mean the amount of fee income obtained by contingency fee lawyers, divided by the amount of time devoted to all representations.