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Gisbrecht v. Barnhart:

Contingent fees prevail over Lodestar method

In Gisbrecht, the U.S. Supreme Court settled the issue of whether federal courts should grant disability attorneys contingent fees or hourly fees for their court work. The Court held in its 8-1 decision that 42 U. S. C. §406(b) does not displace contingent-fee agreements within the statutory ceiling; instead, §406(b) instructs courts to review fees for reasonableness.

Contingent Fees in General

A contingent fee is a fee for legal services that the client pays after successful completion of those services; it is usually calculated as a percentage of the client's gain. No fees are paid if the case is lost.

The Court reviewed the history of contingent fees generally, stating that contingent fee arrangements can be problematic, especially when they are not exposed to court review. But they are also common in the United States in many settings, and Social Security representation operates largely on a contingent fee basis. Contingent-fee contracts are generally enforceable unless they are unreasonable. See for example Leonard C. Arnold, Ltd. v. Northern Trust Co., 506 N.E.2d 1279, 1281 (1987), which states that contingent-fee agreements are the "poor man's key to the courthouse door: they enable persons who cannot afford to retain an attorney on an hourly or fixed-fee basis to pursue their claims with competent counsel." (internal citations and quotation marks omitted).

Contingent Fees and Social Security Representation

The Court went on to note that Congress-in addition to protecting claimants against inordinately large fees-sought to ensure that attorneys successfully representing Social Security claimants would not risk nonpayment by their clients. Congress therefore authorized agency payment of fees directly to counsel from funds withheld from the claimant's past-due benefits.

406(b) Doesn't Bar Contingent Fees

But the Court held that nothing in §406(b)'s text or history reveals a design to prohibit or discourage attorneys and claimants from entering into contingent-fee agreements.

The Contingent Fee Must Be Reasonable

Within the 25 percent boundary Congress provided, the attorney for the successful claimant must show that the fee sought is reasonable for the services rendered. Courts have reduced the attorney's recovery based on the character of the representation and the results the representative achieved. If the attorney is responsible for delay, for example, a reduction is in order so that the attorney will not profit from the accumulation of benefits during the pendency of the case in court. And if the benefits are large in comparison to the amount of time counsel spent on the case, a downward adjustment is similarly in order. Although the Court rejected the Lodestar method of calculating fees-which applies a reasonable hourly rate to reasonable hours spent-it allowed for courts to examine the hours spent as a factor in determining the reasonableness of the contingent fee.

EAJA Offset

As always, the 406(b) fee is subject to the EAJA offset.  In other words, if an EAJA fee is awarded that amount should be subtracted from the fee charged to the client. 

Scalia's Two Cents

The lone dissenter, Justice Scalia felt that the Lodestar method was the only logical way to calculate the attorney's fee. He complains that it is irrational "to look at the consequences of a contingent-fee agreement after the contingencies have been resolved, and proclaim those consequences unreasonable because the attorney has received too much money for too little work. That is rather like declaring the purchase of the winning lottery ticket void because of the gross disparity between the $2 ticket price and the million-dollar payout."

Open Issues

            It remains to be seen how district courts will apply this ruling. In theory, it should be easier to get a 406(b) fees approved absent one of the red flags discussed in Gisbrecht, such as attorney created delay.  One troubling aspect of the opinion is that-while it rejects the Lodestar method-it still allows a role for scrutiny of attorney time logs. But the court gives no guidance has to a reasonable hourly rate given the contingent nature of the case.  If an attorney only wins 1 in 5 cases taken to federal court, should that attorney be entitled to an hourly fee 5 times the average charged by federal court attorneys. Or is the purpose of examining the time log merely to determine whether the attorney had worked hard enough on the case to merit the contingent fee dictated by the fee agreement. If the latter, doesn't that undermine the whole concept of the contingent fee? Are the hours spent more important than the difficulty of the case, or the likelihood of winning the case, or the attorney's federal court experience, or other factors not discussed by the Supreme Court? This decision, while seen generally as good news for disability attorneys, could very well create years of confusion before the dust settles.

            Another issue that early discussions of Gisbrecht have raised is whether § 406 imposes an overriding 25% cap on fees collectible from the client whether collected at the administrative or the court level. Most seem to agree that-while 406(a) and 406(b) are distinct sections providing for distinct fees with distinct rules-it will be difficult to explain this in court when trying to justify a 406(b) fee that when combined with the 406(a) fee is greater than 25% of past due benefits. Gisbrecht does nothing to resolve this issue, and again it will likely take a long time before a clear procedure develops. For now it is probably wise to only request fees above 25% in the aggregate in cases where the hours spent justify the higher fee. It would also be important to explain to the judge that the back due benefits are only a tiny fraction of the lifetime benefits the claimant will receive. The pie attorneys carve their fee from is a tiny pie indeed.

Where Does This Leave Us?

            Social Security disability attorneys still find themselves severely limited in the fees they can collect and the contracts they can negotiate. While Gisbrecht is a positive development in that it legitimizes the use of contingent fee agreements for court work, it may create more work for disability attorneys when it comes time to justify their fee.

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