The economics of litigation continue to receive more attention. For example, an April, 29, 2016 post at CLS Blue Sky Blog brings news of a new litigation economics article by Albert H. Choi, the Albert C. BeVier Research Professor of Law at the University of Virginia Law School, and Kathryn E. Spier, the Domenico de Sole Professor of Law at Harvard Law School. The post builds on their recent paper, “Taking a Financial Position in Your Opponent in Litigation,” which is free on SSRN.

One part of the CLS article is pasted below; all parts deserve a read.

“We begin by analyzing a setting with symmetric information, where the plaintiff, the defendant, and capital market know all the relevant parameters, such as the size of the damages, cost of litigation, and the probability of plaintiff winning. By taking a short position in the defendant’s stock, the plaintiff can transform what would otherwise be a negative expected value claim into a positive expected value one. This, in turn, implies that more cases will be filed ex ante. While some of these claims may be meritorious and socially valuable, others may not be. Indeed, through a sufficiently short position, the plaintiff can credibly threaten to bring any suit to trial, even an entirely frivolous one where everyone agrees that the plaintiff’s chances of prevailing in litigation are (near) zero. Short selling improves the plaintiff’s bargaining power for positive expected value claims as well, leading to larger settlement payments by the defendant. Conversely, when taking a long position in the defendant’s stock, the plaintiff’s threat to go to trial and bargaining position are compromised. After presenting the basic results, we consider five extensions of the symmetric information analysis: (1) a less efficient financial market that is initially unaware of the lawsuit; (2) differential litigation stakes in which the damages that the defendant pays are larger than the plaintiff’s recovery; (3) the loser-pays-the-costs rule; (4) endogenous litigation cost, where the amount of resources spent on litigation depend on the stake; and (5) plaintiff risk aversion. We show, in particular, that the loser-pays-the-costs rule can function as an effective screening device that keeps plaintiffs from accumulating financial positions to file frivolous claims.”

Here (but subscription required) is a Chicago Daily Law Bulletin article regarding an interesting ruling on two aspects of entrepreneurial claiming. The opinion holds that a 40% contingent fee is a reasonable fee for contingent patent fee claims. The case also holds that since patent law claims arise under federal law, the federal courts also are the proper place for legal malpratice claims involving patent law.

The article also is pasted below, in part:

By Pat Milhizer
Law Bulletin staff writer

When law firms are hit with legal-malpractice claims involving patent disputes, those claims should be handled in federal courtrooms — instead of state courts — since that’s where the underlying patent dispute began, the 1st District Appellate Court has held in a ruling that’s the first of its kind in Illinois.

In the same opinion issued this week, the appellate justices also said that a law firm that prosecuted several patent claims for one client on the condition that the attorneys would get 40 percent of all of the potential settlements and verdicts was being reasonable and didn’t violate any rules of professional conduct.

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When they were hired, the attorneys inked a contingency fee agreement with Premier that they would bill for reasonable and necessary expenses. In addition, the contract stated that the lawyers would get 40 percent of any payments that the company received as a result of licenses, settlements, judgments and other related court decisions through the life of the patents.

The deal included a termination clause for either party, and if that happened, the lawyers would be eligible for quantum meruit pay, meaning a judge or jury would decide how much they would be paid for unfinished work.

The lawyers secured several settlements and millions of dollars for Premier, according to an attorney who represented the firm on appeal in the malpractice claim.

In one of the cases, the company hired the lawyers to prosecute a patent claim against Lucent Technologies regarding a system that amplifies telephone signals.

But that lawsuit got shot down.

A federal judge granted summary judgment to Lucent, and the decision was affirmed by a federal appeals panel in an unpublished opinion.

Premier then sued the law firm for legal-malpractice, saying that the lawyers failed to use scientific evidence that it was provided with to rebut a claim made by Lucent. Premier said that if the lawyers had used the information, it would have won the federal lawsuit.

The law firm filed a motion to dismiss the malpractice suit with prejudice due to a failure to state a cause of action, and Cook County Circuit Judge Kathy M. Flanagan did dismiss it — but on the basis that she lacked jurisdiction.

Flanagan also found that the contingent fee was valid and enforceable.

Both sides filed appeals, and in a 12-page opinion released Tuesday, an appellate panel affirmed the circuit court decisions. The decision was written by Appellate Justice Joy V. Cunningham; Justices Thomas E. Hoffman and Themis N. Karnezis concurred.

Premier alleged that the contingent fee deal with the law firm violated the Illinois Rules of Professional Conduct, which requires that attorney fees be reasonable. The appellate justices also read Premier’s complaint to say that the law firm violated the conduct rules by entering into a business transaction with the company.

The justices held that there was no business transaction and that the agreed-upon fee wasn’t unreasonable.

“The facts of the underlying case suggest the need for highly skilled legal representation in a very technically narrow area of patent practice,” Cunningham wrote. “Premier obviously had confidence in Stadheim’s ability to represent its interests in this narrow, technical area of patent law.”

The panel then addressed the question of whether legal-malpractice actions must yield to federal jurisdiction when the malpractice action requires a resolution of patent law issues.

The court relied on three cases in other states to reach its conclusion, ruling that “because the federal court has exclusive jurisdiction over patent cases, this jurisdiction also extends to cases in which the plaintiff’s right to relief necessarily depends upon the resolution of a substantial question of patent law.”

The case is Premier Networks Inc. v. Stadheim and Grear Ltd., et al., No. 1-08-1133.

You may recall this prior post regarding Spain’s high court striking down a statute prohibiting contingent fees. A friend and Spanish law school instructor, Albert Azagra, was kind enough to to provide the following additional specifics on the ruling. I posed the questions and Albert provided the answers, with a caveat that he is not an expert on the issues and I edited a word here and there:

(1) Was the source of the restriction based on what American lawyers
would call legal ethics rules?

Yes. Section 16 of the Code of Professional Responsibility of the Spanish
Bar Association expressly banned contingency fees as the sole form of
compensation. It only allowed a fraction of the compensation to be linked
to the results and, in any event, the client had to pay at least the costs
of rendering the service. Note further that the rule prohibiting
contingency fees was also included in a national regulation governing
lawyers – albeit not an Act of Parliament- that had been upheld by the
Supreme Court some years ago. This makes the November decision even more
important.

(2) Did the court strike down the rule based on some “constitutional”
grounds or based on EU or Spanish laws on restrictions on competition.

The Court struck down the rule mainly on the grounds of Spanish competition
law.

(3) How wide an impact might we expect from this decision. (eg is this a precedent for all EU countries) and whether the outcome can be changed by, for example, an amendment to existing legislation?

Spanish statutes and case law are generally not very influential in other European countries. Actually, traditionally we copy the French and, to a lesser extent, the German, and the Italian. German and US law are becoming more and more influential.

Also, generally speaking, in the Civil Law tradition decisions by the courts of other Civil Law countries do not constitute precedent. Of course, EU courts and the European Court of Human Rights decisions are a different story.

Spanish Law Review and Blog

Albert also sent word this weekend about a website and blog that cover tort law issues in Spain, with the website including a section in English for some but not all of the papers. Here’s what he explained, and the links:

“My research group is now launching a blog. It publishes brief analytical comments on bills, judgments, legal education and other topics. The blog is called Abogares (http://www.abogares.com/) and it is the blog of InDret (http://www.indret.com), our SSRN-listed electronic law review with more than 3,000 subscribers from around 30 countries. The law review has published 77 of its 708 articles entirely in English, and we expect the blog to have posts in English, too.”

Albert is a great person and quite learned – you can find him on LinkedIn.

I’m back to work after enjoying about 10 days of travel in Europe. Each day of the trip revolved around law in one way or the other and provided some great opportinuties for learning It was great to meet new people and exchange ideas and information about legal systems and law around the world. On and off over the next couple of weeks, some posts here will provide brief comments on some of the exchanges relevant to tort litigation. If interested, read after the line below for more specifics on reasons for the trip and the resulting learning opportunities.

One new piece of knowledge gained is that Spain’s Supreme Court ruled last November that contingency fees can not be prohibited and so are now legal in Spain. This news was provided by Albert Azagra Malo, a Spanish law school instructor who has written extensively on mass tort issues and this year was in Chicago to obtain an LLM from the University of Chicago. Albert is a great person and quite learned – you can find him here on LinkedIn.

Overall, the ruling in Spain makes the point that it’s time to forget the old bromide that Europe will never allow contingent fees. UK countries and others already allow “uplift” fees that provide a modest fee through a fee multiplier, and the countries are are under increasing pressures to embrace pure contingency fees. Indeed, I spoke with an excellent UK defense lawyer who said he expects to see contngency fees adopted in the UK within the next few years. The ruling in Spain adds to the pressures because the gist of the ruling is that prohibiting contingency fees unduly restricts competition and imposes a minimum fee requirement. Here is a paper – in Spanish – that provides more specifics on the opinion. The SSRN abstract for the paper calls the ruling a revolutionary decision and explains the ruling as follows:

“Contingent fees have been traditionally prohibited in the Spanish legal system. However, on November 4th, 2008, the Spanish Supreme Court rendered a revolutionary decision on the issue. Under Competition Law, the Court quashed the prohibition under the reasoning that it affected competition by restricting the attorney and its client to freely set the price of the legal assistance and, therefore, imposing indirectly a minimum fee.”

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Among other things, two organized events provided opportunities for learning. One event was an asbestos litigation conference I chaired in London on asbestos claiming around the globe. The conference was attended by lawyers from Australia, UK, Switzerland, Germany, Italy, Spain and France. We made the conference quite interactive and so everyone learned even more.

The second opportunity for learning was a meeting of 99 lawyers from 49 countries for the annual meeting of international law group known as the International Business Law Consortium. The IBLC provides global contacts and resources for medium and small law firms around the world. My law firm has been a member for about 4 years and the meetings, calls and emails offer a great way to meet excellent lawyers and learn more about what’s happening in the real world. We also seek to refer work to each other, and thus last month I spent some time working with a lawyer in the Netherlands on trademark issues.