Working Paper BETA #2019-03

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Title : Lawyer Fee Arrangements and Litigation Outcomes: An Auction-Theoretic Perspective

Author(s) : Yannick Gabuthy, Pierre-Henri Morand

Abstract : Many jurisdictions in Europe foresee the opportunity to allow the use of pay-forperformance (outcome-based) contracts in lawyer-client relationships, via the socalled contingent/conditional fees. In this article, we analyze the welfare implications of such fee regimes – regarding their effects on litigation outcomes – by modeling the lawsuit as an auction. The criteria for regime comparison are litigation costs, lawyers’ profits, and parties’ incentives to reach a pre-trial settlement. The main result shows that switching from hourly to outcome-based fees may increase the trial costs and the lawyers’ profits, and enhance the likelihood of settlement (by decreasing the litigants’ expected utilities at trial). This last effect may challenge an important argument in favor of pay-for-performance contracts, that is the objective of promoting access to justice, which is an overriding public policy motivation behind the introduction of these remuneration systems.

Key-words : Litigation expenditures, Pre-trial settlement, Legal fees.

JEL Classification : D44, K40, K41.