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A MODEL LEGAL SYSTEM, Part #5 -- "Follow the Money"




Our legal system needs a revolution. Revolution would normally be a scary word, but we now know our financial services system needs a regulatory revolution. The entire legal system is just as sick inside. Thus, I am proposing a legal revolution on the same scale. The six components of A Model Legal System can be found immediately below at "A Model Legal System, Part #4"

Now, we are on to #5. While #4 is the linchpin, #5 has to do with money.

Our legal system has a contradiction which creates exorbitant attorney fees paid for by the public and nothing is being done about the problem.

The Downtown Law Firm: Having spent fourteen years in the insurance business, responsible for litigation across the entire United States including Wall Street, I have seen the problem of runaway attorney fees in virtually every state in our nation. Since then, for twenty years, I have been a plaintiff's attorney. In a nutshell, here is how it works. Typically, a plaintiff's lawyer, let us call this person Whiplash Willie, will take a case on contingency fee. If the attorney gets the client any money for a personal injury case, for example, the attorney will charge between 25% and 40% of the recovery for attorney fees. The theory behind this contingency fee is that the client would probably not be able to afford to pay the attorney a large retainer, so the client and the attorney become partners in asserting and processing the claim. Further, the attorney would normally be able to get the client 25%-40% more than if the clients tried to handle the matter for themselves, so the contingency fee is really not hurting the client in the final outcome--in theory and usually in practice.

Arrayed against the plaintiff's lawyer is the insurance defense lawyer. Usually "downtown law firms" are hired by the insurance company to defend against Willie's advocacy for his client, the plaintiff. Immediately there are competing interests. The plaintiff's lawyer is interested in a reasonable settlement at an early stage of the proceedings. Studies have determined that the longer a case is pending the higher is the ultimate settlement. The insurance defense attorney has a different perspective. The longer the case pends, the more money the insurance defense firm will get in attorney fees from the insurance company. Thus, Willie wants an early settlement and the insurance lawyer wants to go through the routine. The routine is what is known as the "feeding trough for young lawyers" at the insurance lawyer's law firm -- DISCOVERY. Our legal system decided long ago to ensure a system in which there would be few surprises at trial. Therefore, either side is entitled to a formal process to "discover" what the other side has in order to evaluate what future legal path to take. Since over 95% of all cases are settled without going to court, the discovery routine usually does not get used in the particular case.

There is the fly in the ointment. "Discovery" knows no bounds. It can go on almost forever and is the tool to pay the rent at the insurance defense firm. Discovery can either be done formally by subpoena and depositions or informally by voluntary disclosure. The insurance defense firm will never agree to voluntary disclosure because that is too efficient and would reduce the attorney fees to the "downtown" law firm. Willie, on the other hand, wants to process the claim with the least expense because often the plaintiff's attorney has to front the costs of processing the claim and would rather do things efficiently. It must be said that there are many 'Willies' out there that are not very good at what they do or knowledgeable about how to efficiently process a plaintiff's case. Moreover, there are many Willies that try to handle too many cases or otherwise procrastinate causing them to be unresponsive to information requests by the insurance defense lawyer.

If one looks at the big picture, which is seldom done either in the media nor by pundits, insurance companies are the "invisible bankers" of our financial system in the United States and are not very good at controlling their costs. Why not? The answer is easy, but often overlooked. When the country has a recession, you will read about the billion dollar losses at General Motors and the concomitant layoffs. You will read about housing market bubbles with countermeasures by the various industries involved. You will never read about an insurance company trimming their sails to become more efficient. They simply are awash in cash and have no incentive to address societal issues that trouble most citizens nor do insurance companies require their management to take meaningful countermeasures to ensure the efficiency of their lawyers. Worse, there is sort of an unholy alliance between middle management at the insurance companies and their local law firms. Often, worse than the lobbying that goes on in Washington D.C., insurance company lawyers wine and dine middle insurance managers to ensure that they maintain the legal relationship. Once, I was the recipient of such favors which reduced itself to the pathetic. At an expensive dinner in downtown San Francisco, the insurance lawyer got quite drunk at a festive dinner. He lamented that several of the seasoned attorneys that he had trained had formed their own law firm and gutted his law office of the trial horses. Eventually, he started crying while begging me to ensure that our company would continue to use his law firm notwithstanding the loss of his trial lawyers. The insurance companies have little reason to press their lawyers to handle claims that go into litigation efficiently. How do I know this? While working for major insurance companies across the United States I analyzed this trend and was as guilty as anyone of not doing anything about this contradiction in our legal system. Everybody in the legal system is simply too comfortable in their particular role in what is a calamitously inefficient system that citizens pay in advance for every time they pay their local insurance company the premiums that stoke this legal process that costs everybody dearly.

There are simple remedies. First, the law should require that both sides engage in informal information exchanges without formal discovery (including no depositions--a simple recorded interview would suffice in most cases). Second, a mediation system should be required before formal discovery. Mediation could resolve over half the cases if there was a commitment by our legal system to require it in a universal manner. Third, attorneys fees of both sides should be subject to approval by a neutral knowledgeable panel which would include members of the public. Currently, attorney fees must be approved in probate and workers' compensation, so there is nothing revolutionary about this requirement.

Lee Iacocca recently wrote a book entitled "Where Have All The Leaders Gone? Nowhere is that more true than in our local legal system. Our state Supreme Court could exert leadership but is not interested in anything but their prerogatives and self-bouying awards to themselves. Our state Bar association could assert leadership, but the opposite is happening. Our local Bar associations mean well, but have narrow interests. Essentially, across the United States and I have worked in the legal system across the entire United States, we have an oligarchy. This means that our legal system is governed by the few who have no interest in rocking the boat or changing things. Ostensibly, they would say they have the public's interest at heart, but where is the proof? Our legal system is sick and there is no ambulance on the way. Our legal system is sick and has no real leaders and no hospital. Lawyers have become an eternal joke and yet they operate as nothing bad is happening. What me worry? It is time for big changes in our legal system. But where are our leaders?

Michael Clayton, The movie: This movie arrays corporate greed along with their henchmen against an older lawyer from their corporate (downtown) law firm. The older lawyer is trying to do right. The counterforces will go to any length to preserve corporate greed. I have been there. Most corporations are benign. Most of their downtown law firms are not. That is where the trouble lies. Don't kid yourself.

Posted on Friday, December 19, 2008 at 12:27PM by Registered CommenterLAUREN PAULSON in | CommentsPost a Comment | References6 References

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