The Indiana Supreme Court recently decided a case that clarifies the effect of a statutory fee limitation on the fees plaintiffs’ medical malpractice lawyers may charge their clients and offers broader guidance to attorneys who handle contingent fee cases.

FEE LIMITS UNDER THE ACT

Since its inception in 1975, the Indiana Medical Malpractice Act has imposed certain limits on attorney fees plaintiffs’ lawyers may charge in med mal cases. Meritorious med mal cases have two recovery components.  The first is from the negligent medical provider.  If the recovery from the provider is of the requisite amount (currently $250,000), the patient qualifies to claim further compensation from the Patients’ Compensation Fund, up to a total recovery cap that is currently $1,250,000.  IC 34-18-14-3(a)(3) and (b).  Over time, both the qualifying provider recovery and the total compensation cap have increased.  But the basic two-part recovery structure has remained intact.

The Act has always limited the amount of fees lawyers may charge their clients on recoveries from the Fund to fifteen percent. IC 34-18-18-1.  But it leaves fees on recoveries from providers unregulated.

BLUNTING THE IMPACT OF FEE LIMITS

After an unsuccessful constitutional challenge to this fee limitation in Johnson v. St. Vincent Hosp., Inc., 404 N.E.2d 585 (1980), many plaintiffs’ lawyers began using fee agreements that permitted them to take as high a percentage of the provider recovery as was needed to make the overall fee equal (or as close as possible) to a set percentage—typically one-third.  This meant that as the recovery from both sources approached the overall compensation cap, the percentage the lawyer took from the provider recovery reached one hundred percent.

This sliding scale approach was widespread in the plaintiffs’ med mal bar until the Supreme Court decided Matter of Benjamin, 718 N.E.2d 1111 (Ind. 1999), a lawyer discipline case.  Benjamin’s actual fee from his client’s med mal recovery clearly violated the Act’s limit.  But in order to salvage a greater amount of the challenged fee for himself, Benjamin offered an after-the-fact alternative method of calculating his fee that was much like the sliding scale described above.  Even though that alternate fee proposal was not directly at issue in the case, a footnote in the opinion criticized the sliding scale approach: “We find that approach to be an attempt to circumvent the statute limiting the recovery allowed from the Fund.  By retaining as his fee an unreasonable portion of the recovery from the settlement with the hospital, the respondent would have effectively offset the 15 percent limitation on his fee from the Fund recovery.”  Id. at 1113 n. 2.

The Benjamin footnote provided the basis for an agreed sanction in a recent lawyer discipline case, Matter of Stephens, 851 N.E.2d 1256 (Ind. 2006) (“Stephens I“).  In this case, among other things, the disciplined lawyer used a similar sliding scale fee arrangement.  Accepting the agreed discipline and relying on the Benjamin footnote, the Court ominously stated: “Respondent’s attempt to avoid the statutory limit on Patient Compensation Fund attorney fees was wholly improper.  Not only did respondent seek to avoid the clear language of the statute, but he also sought to do so by suggesting an unreasonable fee arrangement, thereby violating the Rules of Professional Conduct.  In the future, violations of this nature are likely to result in discipline that is more serious.”  Id. at 1258.

ITLA TO THE RESCUE!

Stephens I caught the plaintiffs’ bar off guard, in part because, until Stephens I was decided, plaintiffs’ lawyers were unaware that the issue was before the Court. Benjamin notwithstanding, sliding scale fee arrangements had remained in common use.  The Indiana Trial Lawyers Association filed a motion to intervene and asked the Court to reconsider whether a sliding scale fee arrangement conflicted with the Act’s fifteen percent fee cap on recoveries from the Fund and was, thus, unethical.  The Disciplinary Commission agreed that the ITLA should be given an opportunity to be heard, but indicated that it would, and ultimately did, brief the issue against the ITLA position.  The Court invited amicus participation, but none was forthcoming.

On May 31, 2007, the Court issued a per curiam opinion, Stephen II, 867 N.E.2d 148 (Ind. 2007), revisiting the use of sliding scale fees in med mal cases.  The Supreme Court reversed its position and credited the ITLA’s position that “fees so limited will significantly impair the ability of claimants to present their cases.”  The Court held that it was not an unreasonable fee in violation of Rule of Professional Conduct 1.5(a) for lawyers to use a sliding scale fee agreement in med mal cases, so long as the fee on the total recovery is otherwise reasonable.

Based on affidavit testimony submitted by the ITLA, the Court suggested that to the extent the legislative fee cap on Fund recoveries, as applied in Stephens I, drives fees down to the point of seriously impeding the ability of injured patients to obtain effective legal representation, the constitutionality of the Act might be called into question.  The Court explicitly overturned Johnson, Benjamin and Stephens I to the extent they conflict with its decision in Stephens II.

NO SAFE HARBOR FOR CONTINGENT FEES

Stephens II makes several noteworthy observations about contingent fees generally.  It is required reading for all lawyers who handle these type of cases.

The Court indicated that there is no such thing as a contingent fee percentage that is guaranteed to be within a “safe harbor” range. The particulars of each case must be taken into account in determining whether a given fee percentage is reasonable.  This is an interesting contrast with the one-size-fits-all, one-third contingent fees that are so prevalent.

Among the factors lawyers should take into account in determining the reasonableness of a given fee, the Court did not include charging extra-generous fees on “good” cases to counter-balance low or no fees from small or non-recoveries in “bad” cases. In other words, the idea of cross-subsidies between contingent fee cases is suspect.  The Court also noted that it agreed with the Commission’s assertion that a forty percent fee is ordinarily the maximum fee that should ethically be charged.

Finally, the Court explained that any sliding scale fee agreement must fully disclose to the client that there is a statutory limit on the fee that may be taken on the Fund recovery. A footnote in the opinion provides one example of a disclosure that the Court found to be adequate.

TIMING IS EVERTHING

A sliding scale approach to fees in med mal cases raises a question of timing. When the client obtains a settlement from a provider that qualifies for further compensation from the Fund, the lawyer and client will have no way of knowing what percentage fee the lawyer will ultimately be entitled to take from the provider recovery until the amount of the Fund recovery is known.  For example, if the claim against the Fund yields no additional compensation, the terms of the fee agreement may limit the lawyer to a one-third fee against the provider recovery.  But if, by contrast, the claim against the Fund yields a maximum recovery, the terms of the agreement may allow the lawyer to take one hundred percent of the provider recovery.  It would be decidedly unfair for the plaintiff’s lawyer to take more than one-third (to use my example) of the provider recovery on the mere assumption that more money will be forthcoming from the Fund.

NO PERFECT SOLUTION

One possible solution to the timing problem might be to escrow the portion of the provider recovery that might later become available as additional fees once the Fund recovery is fixed. A disadvantage of this approach is that, in some cases, it denies the plaintiff access to any settlement funds until the amount of the recovery from the Fund is known.

Another solution might be to advance to the client all but one-third of the provider recovery (less costs) with the understanding that there will be a financial reconciliation between lawyer and client once the amount of the Fund recovery is known. This approach means that the lawyer will technically be taking more than fifteen percent of the Fund recovery as a fee, albeit as repayment of the funds advanced earlier.  In effect, the earlier advance is a loan to the client of part of the lawyer’s yet-unknown fee, to be repaid later from the client’s portion of the Fund recovery.  This approach could be problematic, absent compliance with Rule of Professional Conduct 1.8(a), if the lawyer includes any terms in the agreement, such as charging the client interest on the advance, that put the lawyer and the client at economic odds in the transaction.

In either event, the lawyer should take these matters up with the client at the outset of the representation and include a clear description of what will happen in the written fee agreement; not wait until there is a recovery from the provider before broaching the subject.

A FUTURE CHALLENGE

Plaintiffs’ med mal lawyers should be rightfully overjoyed with the result in Stephens II.  One public policy argument that helped carry the day before the Supreme Court was that the Fund’s fee cap, unless offset by higher-than-normal fees on provider recoveries, will push plaintiffs with difficult liability facts and smaller financial losses out of the compensation system altogether.  The fact that no one, save the Disciplinary Commission, stepped forward to argue an opposing viewpoint causes one to wonder whether anyone should be considered a loser in the case.

The Disciplinary Commission certainly has no institutional stake in the public policy debate over the wisdom of statutory fee limits in med mal cases. In a concurrence, the Chief Justice took note that “our Disciplinary Commission has found itself in the awkward position of noting the interest of a client it does not represent, the General Assembly.”

A question for the future is whether the plaintiffs’ med mal bar will back up its public policy argument by continuing to extend effective representation to plaintiffs who would have been marginalized out of the med mal compensation system under the Stephens I regime; or instead, cherry-pick cases using Stephens II as just an opportunity to enhance the bottom line.  Perhaps the answer to that question will tell us whether Stephens II had any losers.