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Re:Living Capitalism in My Context "Inbox" - Financial Services, Arbitration & Loser Pays Legal Fees

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As someone that has been in the financial services industry for 31 years and in management for some of the biggest investment firms in the world for 24 of those years, I can say I see both sides of your argument. There are instances where I have seen the forced arbitration rule work against clients. I was not involved but VERY aware of a large case in an office near mine that the plaintiff was probably harmed by the arbitration clause. The case was very large, a very wealthy household that was suing mainly because the advisor and the client’s husband had a long-term affair. There was an excessive amount of trading in the account that was for the purposes of generating commissions (in my opinion). The panel awarded the client $XX million but it could/should have been so much more and, in my opinion, the panel only awarded that amount because the members on the panel would not want to have their name attached to a super-large award for fear of being rejected in future arbitrations by the brokerage firms for awarding such a large award. This is a rare case because of the size, and I do feel that the overwhelming majority of smaller cases do get fair hearings.

I have seen the other side of it where clients will file frivolous claims, and I myself have been taken to arbitration over a ridiculous claim. The firm settled the claim for $.03 on the dollar to avoid the cost of arbitration. All this to ask you a question about your thoughts on the legal system rules around lawsuits and arbitrations. What are your thought around contingency fees with attorneys and if they should be allowed and the loser pays rule where if you lose a case you pay the other side's attorneys fees? How does this fit into the partnership economics ethos?

I am enjoying your book a great deal, and it has given me a lot of things to think about in a different way.


Thanks so much for your thoughtful email. Your professional experience is interesting and insightful. I agree with you that arbitration is not inherently bad, and often is done well and fairly. Our concern and critique is when arbitration is forced by one party (usually the more powerful party) onto the other, rather than being an option for recourse freely chosen by both parties when they find it mutually beneficial for a particular dispute. There is also the conflict of interest concern based on arbitrators not wanting to lose future business from the very parties they arbitrate, such as in the story you shared. Frivolous claims are, clearly, problematic as well.

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We don't yet see a one-size-fits-all solution (such as forced arbitration) for this context, but your questions are good ones -- and big ones that beg further development toward more consistently good solutions. Here are some thoughts to help move the conversations and practices in this context toward more consistently good solutions.

  • Attorney contingency fees can function to align the interests of the client and the attorney -- both benefit if they win the case, and neither benefits if they lose. This mutuality fits the partnership economic ethos. This arrangement also de-incentivizes frivolous cases relative to the attorney being paid for time spent. On the other hand, clients with cases that are legitimate to pursue but not slam dunks to win need attorneys who are fairly compensated for handling the case well, even if they don't get the desired outcome. And in some cases, contingent fees could incentivize seeking extravagant award amounts. There is more to consider here, but I'd say that while both contingency fees and billable hours can be subject to misuse, both can also be viable options -- the key thing from a partnership economics standpoint is that the arrangement is agreed to by both the client and the attorney and carried out in ways that are mutually beneficial.

  • Loser pays rule... this is a meaty topic! Unlike clients and attorneys who choose each other, the lawsuit itself is typically chosen by one side, effectively forcing the other to defend themselves. So what constitutes partnership and mutual benefit in such a scenario? Without a loser pays rule, a perfectly innocent defendant incurs uncompensated expense merely for defending themselves from a meritless claim -- even when they win. An arrangement that inhibits the ability to be made whole when prevailing on the merits -- or on the flip side creates the ability to inflict damage even when losing on the merits -- at the very least creates risk of abuse. On the other hand, under a loser pays rule, incurring expenses with the expectation that the other side will bear them creates the risk of doing whatever it takes to "win" in a one-sided sense while externalizing the costs. I found this article to be a thoughtful and interesting look at several aspects of the loser pays issue. It seems to me the broader matter of how best to align costs (including attorneys' fees) and benefits in legal disputes is ripe for deeper consideration and creative solutions!

Thanks again for reaching out, and we look forward to hearing back from you. Thanks also for your kind words about our book -- would you be willing to write a review or leave a rating on our Amazon page so that others are encouraged to engage the book and this kind of conversation?


Thanks for the reply and your thoughts. I am not sure that everything can be put into the partnership model but I love the idea. I have done something similar with my clients.

On the question of contingency fees I think one of the main issues I have with them is that businesses make business decisions and rightfully so. They will settle claims based on the cost to defend the claim as opposed to the merits of the case. In the investment business firms claim that the cost to defend a claim in arbitration is $100k. So many times cases, especially smaller ones, get settled rather than taken to arbitration. As an advisor this settlement is then on your permanent record and is very hard to get taken off. And the advisor has to pay the attorney fees that are needed to get your record expunged. I know that there are many cases where advisors have either willingly or unwittingly done wrong by the client and there needs to be compensation, but I have also seen this process abused. During market corrections you will see advertisements that basically read 1 800 sue your broker. (I know this brings up a whole other topic of attorneys being able to advertise and solicit business.) Anyway, I don’t mean to make this all about my industry, but I think it does raise some interesting questions for the legal field and its relationship with the financial services business and how it relates to partnership economics.

The article on loser pays was very interesting. I would think that there is additional research that could be done by looking at the Canadian court system since they have a modified loser pays system.

I am enjoying your book; I have since purchased and sent a copy to a very good friend to read. Thanks again.

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