Economic Motives of Defense Attorneys

This column continues the discussion of the economics of law practice. It is the fourth in a series. First, we described the strong ties between law and economics. We pointed out that because the practice of law is a business, the economic motivation of the lawyers handling the litigation can actually make the legal system less efficient for conflict resolution. Quick resolution of legal disputes does not promote the economic interest of the law business. Defense lawyers who charge hourly rates clearly profit from continuation of the conflict. To set the stage for further examination of the economic motivation of lawyers, we explained that dispute resolution can be analyzed as an economic transaction. Plaintiffs have an economic claim against defendants. Dispute resolution (including litigation) is a transaction in which the defendant is forced to “buy” the plaintiff’s claim. Often there is a negotiated settlement.

The present discussion will examine in more detail the economic motivations of defense lawyers. The Civil War decided that the United States would be involved in the Industrial Revolution rather than continuing as an agrarian economy. The case method of legal education evolved at Harvard University in the 1870’s and quickly spread throughout the nation. Before that, would-be lawyers usually “read the law.” Legal education was not primarily a law school function. But from that time forward, law school has been the primary source of legal education. Large firms that worked for the emerging corporate America evolved very quickly. With the advent of automobiles and the attendant litigation, defense work was often assigned by corporations and liability insurance companies to the emerging corporate law firms.

Then in the 1960’s, public interest in law firms began to emerge dealing with matters of public interest such a civil rights. And attorneys who represented plaintiffs also became highly organized, assuming the name “trial lawyers.” By the 1960s, it was no longer fashionable for attorneys to “work both sides of the street.” Attorneys were either defense attorneys or plaintiff’s attorneys, with few exceptions. The mythology of the individual advocate continues to reassert itself in the Atticus Finch mythology; but not many lawyers practice all parts of the legal profession in an individualist style.

By the 1960’s, defense firms had generally adopted hourly rate billing. By then, liability insurance companies had become significantly involved in the economics of dispute resolution. Liability insurance companies were behind the scenes calling the shots for the defense side of cases. Under those circumstances, defense lawyers have little economic motivation to simply assess the facts about a particular case and recommend quick settlement. The justification articulated by defense firms and liability insurers for refusal to settle is the necessity for “investigation.” They engage in discovery; i.e. interrogatories, requests for production and admissions, and depositions in order to “evaluate the case.” But discovery is very expensive for the parties who are trying to get their disputes resolved. If an insurer or defense firm were to simply settle the case immediately after the case is presented, the defense firm would not have the opportunity to bill all of the hours that are involved in the discovery process.

In automobile liability cases insurance is a major factor. Often the limits of liability are $25,000. The insurance company is in the background calling the shots. It has little to lose because there is such a relatively low limit on its liability. So the case undergoes expensive discovery. Companies are often able to settle the cases for far less than is actually justified simply because the company has nothing to lose by refusing to pay until the case “reaches the courthouse steps” for trial.

The delays caused by the economic motives of insurance companies and defense firms in turn causes plaintiff’s attorneys to charge higher contingent fees to cover their own time investment. The total cost of dispute resolution is disproportionately high in comparison to the amount that is actually required to settle the case. Economists call the costs that are involved “transaction costs.” The transaction costs for the people involved in legal disputes are inordinately high, and threaten the effectiveness of the legal system.

If this assessment of the role of defense lawyers seems unfair, it is because the analysis over-emphasizes the point to explain the point. In the next column, we will examine the economic motives of plaintiff lawyers with the same sharp critique. The economics of law practice involving the economic motives of both plaintiff attorneys and defense attorneys present significant problems for the efficiency of the legal system in dispute resolution.