A decade ago, the U.K.'s Daily Mirror newspaper published a front-page photograph of supermodel Naomi Campbell outside a Narcotics Anonymous meeting with the headline, "Naomi: I am a drug addict."
Campbell felt her privacy had been invaded and sued the newspaper's parent company. In 2004, the dispute reached the House of Lords, which upheld judgment in the celebrity's favor. The breach of privacy ruling included a "loser pays" provision--a six-figure success fee on top of the damages.
The media company appealed the verdict and its massive success fee to the European Court of Human Rights (ECHR). On Jan. 18, 2011, the tribunal ruled on Mirror Group Newspapers (MGN) v. United Kingdom, adding an important element to an escalating debate about legal costs in the U.K.
The ECHR said the country's system of conditional fee arrangements (CFAs), which include success fees, violates freedom of expression. In cases using these agreements, if the defendant loses, he pays the winner's legal fees--the success fee in question--in addition to everything else.
"This case, although it doesn't kill them off, is another stone in the eventual avalanche against CFAs," says Alan Dury, a partner at DLA Piper.
The ECHR's decision did not arise in a vacuum. Success fees have been a hot topic in the U.K. for some time. In 2010, respected appellate judge Rupert Jackson, better known as Lord Justice Jackson, finished his massive review on the status of legal costs in England and Wales and made recommendations for improving the situation.
MGN nicely coincided with the government's deliberation on how to implement Lord Justice Jackson's recommendations. The comment period was scheduled to end in February, and the government was expected to make an announcement soon after this issue went to press.
Success fees, also known as "no win, no fee" arrangements, arose as a strategy to provide litigants with limited financial means more equal access to justice, usually in suits against the media and personal injury cases. A lawyer on this type of case would not charge his client for a loss. In the event of a win, the defendant would pay the claimant's attorney fees on top of damages.
Obviously Campbell didn't fit the profile of a typical "no win, no fee" client unable to afford representation. Her case epitomized one of the central problems with the success fee setup, critics say.
"The criticism that's been levied at claimant lawyers is they are cherry-picking cases with greatest chances of success, so it isn't actually enabling greater access to justice," says Antonio Suarez-Martinez, a partner at Edwards Angell Palmer & Dodge.
Additionally, in disputes involving success fees, defendants face extra pressure to settle. The success fees quickly mount if cases go all the way to trial, Dury says.
"There's a real incentive on the defendant to pay up now," he says.
While it's unclear how success fees deliver better access to justice, lawyers are still cleaning up.
Fixing the Problem
The government was surprisingly amenable to the ECHR's criticism of the system, says Eleanor Steyn, a lawyer at Michael Simkins. It's yet another sign that success fees' days are numbered, at least in their current form.
Government officials barely put up a defense to the charges, she adds.
"I get the impression that perhaps the government was quite pleased that the ECHR made its decision for it,"
Institutional support for reform is not new, but experts have expressed surprise at the level of priority the legislature has given success fees. A bill was introduced in Parliament last year that would have limited success fees to 10 percent of damages instead of allowing them to be worth 100 percent, as in Campbell's suit. But it floundered, lost amid contentious elections and the subsequent transition to a new coalition government.
Many expected success fees remain buried beneath other concerns such as the ongoing economic crisis, but the opposite has proved true.
"They've taken it and run with it, and run with it quite hard," Dury says.
Once Parliament decides how to proceed with Lord Justice Jackson's recommendations (which touch on a range of topics, extending far past the success fee question), legislation is expected to be introduced quickly.
"We may well see the fruits of this in 2012," Dury says. "It's relatively imminent, assuming nothing distracts the government in the meantime."
There are varying opinions on the best way to fix success fees. Simply limiting their size remains a popular option, but Jackson also gave a more controversial suggestion that the legislature will have to negotiate: allowing contingency fees in the style of the United States. If that were to happen, victorious claimant attorneys would take their fee from the court-awarded damages instead of on top of them. In other words, the money would no longer be an extra cost for the defendant. It would come
from the claimant--up to 25 percent of his award.
Suarez-Martinez says the chances of that happening anytime soon are unlikely because of the fear of introducing new, American-style problems such as ambulance chasing and huge windfall payouts for attorneys.
"Public policy has seen [that] as unappetizing," Suarez-Martinez says.
Although "no win, no fee" doesn't affect a lot of complex corporate litigation, companies that have dealt with it need to consider a few things, post-MGN.
Steyn says U.K. in-house attorneys within media organizations should check whether they've had to pay out on this kind of case and then see if it's possible to appeal. On the other side of the coin, anyone contemplating whether to enter into one of these arrangements should know the recoverability of any success fee is likely to be challenged by the defendant.
"Some cases they'll fight when they wouldn't have fought before, and other cases they'll drop that they wouldn't have dropped before," Dury says.
On a broader level, MGN and Jackson's review are part of a larger British move toward reining in the price of litigation, especially with regard to businesses.
"[There is] just a general drive and concern in the U.K. to try and keep the cost of civil litigation proportionate," Steyn says. "That's definitely something in-house lawyers should take away."