The Ban on Success Fees in Criminal Cases: An Economic Perspective

Not long ago, major bar associations held elections for their leadership. As someone who studies the legal services market, I watched with interest to see what kinds of pledges would be announced.

As expected, since bar associations are interest groups, the candidates rushed to put forward promises aimed at representing lawyers’ interests. Judged by the interests of lawyers, these pledges were excellent. From the standpoint of consumer welfare, however, that was not necessarily the case.

For example, there were anti-market pledges to exclude private legal service platforms known as “legal tech,” as well as pledges to improve the efficiency of legal services by creating a lawyers’ work portal providing full court decisions and academic papers.

At present, Korean courts selectively disclose full judicial decisions, in contrast to advanced Anglo-American countries where disclosure is the rule. If lawyers are given greater access to case law materials and academic papers, the quality of legal services can improve and prices can fall, so regardless of the original intent, this can be seen as a market-friendly idea.

Another pledge that drew attention was the revival of contingency fee agreements in criminal cases. In 2015, the Supreme Court, in an en banc decision, invalidated contingency fee agreements in criminal cases. A contingency fee agreement is a retainer contract under which a lawyer receives an increased fee if the client obtains the desired trial outcome. As a result of that ruling, contingency fee agreements that had been allowed in both civil and criminal cases were banned in criminal cases, and candidates for bar association leadership pledged to restore them through legislation.

The Supreme Court banned contingency fees for the following reasons. First, because lawyers participate in the exercise of the state’s penal power and have as their mission the protection of human rights and the realization of social justice, decisions on lawyers’ compensation cannot be left to the principle of private autonomy.

Second, if contingency fees are allowed, clients may come to expect that lawyers can achieve success under the retainer contract through improper and unethical means, which could undermine trust in the judiciary. Third, under Korea’s judicial system, which adopts the principle of prosecutorial discretion, judges and prosecutors actively participate in trial proceedings, so trial outcomes are not determined solely by the efforts of lawyers.

At first glance, this may sound plausible, but the reasoning of the ruling is open to criticism on several grounds. First, what the Supreme Court failed to fully consider is that contingency fee agreements are a means of resolving the information asymmetry that exists between lawyer and client. Here, information asymmetry means that in a relationship where a client entrusts work to a lawyer, it is impossible for the client to directly monitor the lawyer’s effort.

However, if a contingency fee agreement is concluded, the client can use the contingency fee as an incentive to induce an appropriate level of effort from the lawyer without paying monitoring costs. But if that incentive mechanism disappears because of the ban, clients and lawyers have no choice but to exchange uniform compensation regardless of effort, thereby undermining market efficiency.

The Supreme Court also pointed out that contingency fees could lead to distrust in the judiciary, but this is a short-sighted view that overlooks how the legal services market works. As noted above, if contingency fees are banned, clients can no longer use them as a tool to incentivize lawyers’ effort.

Clients seeking the best possible trial outcome are then left with no choice but to hire expensive, highly skilled lawyers—the so-called former officials. In fact, demand for highly skilled lawyers may increase, worsening the very distrust in the judiciary that the Supreme Court emphasized. Even now, whenever a criminal case arises, “blind hiring”—the widespread practice of frantically seeking out former officials no matter what—is already rampant, and it is worrying that this custom is unlikely to improve.

We have long seen interest groups constantly resist attempts to improve consumer welfare in fields such as healthcare, real estate brokerage, taxis, parcel delivery, and freight transport. We cannot unconditionally condemn them for faithfully acting in their role as interest groups, but in any case, most of their demands were for themselves alone.

However, the call to revive contingency fees raised in this bar association election is a rare case in which the interests of an interest group and consumers align. Of course, this is not the first time candidates for bar association leadership have raised the idea of restoring contingency fees, but I hope the discussion on reviving contingency fee agreements in criminal cases will move forward, even if only a little, so that the legal services market can become more advanced.

Inyeop Ji, Professor, Department of Economics, Dongguk University; Attorney (Australia)

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Original title: 경제학적 관점에서 본 '형사사건 성공보수약정 금지'

Author: In-yeop Ji

Date: 2023-07-03

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=press&idx=25854