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There are two basic approaches to valuing the periodic payments in a structured settlement or a periodic payment judgment for the purpose of calculating a plaintiff’s contingent attorney fee — the present value approach and the cost approach. Which is better? Each has its merits — as demonstrated by two attorneys who have different views on the issue. COST APPROACH Under the present value approach, an economist applies a discount rate to reduce the periodic payments to a value in today’s dollars. This method depends on a highly mutable variable — the discount rate. Because low future interest requires a higher principal investment and generates a higher fee, it is in the plaintiff’s interest to use a relatively high discount rate, while it is in the attorney’s interest to use a relatively low rate. This creates an adversarial position between attorney and client, as numerous courts have recognized. See, e.g., Nguyen v. Los Angeles County Harbor/UCLA Med. Ctr., 48 Cal. Rptr. 2d 301, 309-310 (Ct. App. 1995) (“the Present Value approach invites the attorney to ‘beef up’ the value of the periodic payments”); Schneider v. Kaiser Foundation Hosp., 264 Cal. Rptr. 227, 231 (Ct. App. 1989); Johnson v. Sears, Roebuck & Co., 436 A.2d 675, 678 (Pa. Super. Ct. 1981). Under the cost approach, the value of the periodic payments is the amount the defendant actually pays for an annuity to fund the payments. Most courts and even some legislatures have adopted this approach. See Schneider, 264 Cal. Rptr. at 231-232, listing cases; see also Bonarek v. Wayne County Bd. of Institutions, 419 N.W.2d 21 (Mich. Ct. App. 1987); Ariz. Rev. Stat. Ann. � 12-586 (A)(2) (West 2000); N.J. R. Gen. Application 1:21-7(h) (West 2000). The cost approach is preferable for at least two reasons. First, it eliminates the variable result of the present value approach, and thereby eliminates the conflict between the attorney and the plaintiff. Second, the cost of the annuity takes into account the possibility that the plaintiff may not live as long as expected or hoped. See, e.g., Nguyen, 48 Cal. Rptr. 2d at 311; Johnson, 436 A.2d at 678. Thus, the cost approach makes the attorney share with the plaintiff the likelihood of a reduced recovery due to a reduced lifespan. Attorneys dislike the cost approach because it inevitably yields a smaller fee. But, as a California Court of Appeal has noted, any other approach “produce[s] attorneys’ fees probably considered excessive under [the California Rules of Professional Conduct, the ABA Model Rules and the ABA Code].” Schneider, 264 Cal. Rptr. at 231. Nevertheless, the California Supreme Court has weighed in on the side of present value over annuity cost. Salgado v. County of Los Angeles, 967 P.2d 585, 80 Cal. Rptr. 2d 46 (1998); see Holt v. Regents of Univ. of Cal., 86 Cal. Rptr. 2d 752, 761 & n. 6 (Ct. App. 1999). In doing so, the court chose to protect attorney fees at the expense of medical malpractice plaintiffs. The court did not directly address the attorney fee issue; indeed, it ostensibly declined to address how fees should be calculated, but it upheld the present value approach in the case before it and observed that present value is “ordinarily used” to determine attorney fees. See Salgado, 967 P.2d at 595, n.6. As noted, this formula pits attorney against client and allows excessive attorney fees in periodic payment cases. PRESENT VALUE APPROACH In Jones & Loughlin Steel Corp. v. Pfeifer (1983) 462 U.S. 523, 537-549, the U.S. Supreme Court examined the economic dynamics of discounting to present value and concluded that a trial court would not be reversed if it adopted a “discount rate between 1 and 3 percent and explains its choice.” 462 U.S. at 549. The Court’s opinion, authored by Justice John Paul Stevens, is a tour d’horizon of the search for an appropriate discount rate that ranges from jurisdictions that peg the discount rate to future price inflation yielding a low present value (462 U.S. at 543), to courts that do not discount at all with the opposite effect (462 U.S. 544-545). The choice the Supreme Court made was what many call the “real rate of return,” which is the difference between the rate of inflation and interest on a “best and safest investment.” It is the middle ground between the two extremes. The Supreme Court has returned twice to the subject of discounting to present value since the Jones & Loughlin decision and has not changed course on this subject. The Court has ignored the cost-of-annuity approach. The annotation in 21 ALR 4th 21, titled “Effect of Anticipated Inflation on Damages for Future Loss — Modern Cases,” lists 27 state jurisdictions that have now recognized that the rate of inflation may be considered in arriving at present value, which is a concept central to discounting to present value. Other annotations confirm the ubiquity of this approach. 14 ALR 2d 485, 542; 79 ALR 2d 259. The flaw in the cost-of-annuity approach is that the central decision in arriving at the cost, the anticipated life expectancy of the plaintiff, is made outside the courtroom by the annuity company. Experts may well differ on this subject. Yet, the decision is made unilaterally by the company. It is certainly not a decision of fact made by the jury or even the judge, even though it is a centrally determinative component of the “cost.” One would think that the value of a judgment should be determined in the courtroom, not the boardroom. If the jury finds and determines a “present value,” such as for future earnings, that sum is paid out after judgment is entered. That is the whole reason for finding present value. If the discount rate is high, the “present value” recovery will be low. If the discount rate is low, the recovery will be high. It is only a high recovery that will produce a high fee for the lawyer. What client would not prefer a high recovery over a low one? As an example, if a “high” discount rate is applied to $1 million to produce a recovery of $200,000 and a “low” rate to produce a recovery of $500,000 and the fee is 25 percent, the former client will retain $150,000 and the latter $375,000. There is no “conflict” here. Until the California Supreme Court decided Salgado v County of Los Angeles, 967 P.2d 585, 80 Cal. Rptr. 46 (1998), the California Courts of Appeal were open to either approach. See, e.g., Hrimnak v. Watkins, 45 Cal. Rptr. 514 (1995) [present value]; Atkins v. Strayhorn, 273 Cal. Rptr. 231 (1990) [present value]; Schneider v. Kaiser Foundation Hosp., 264 Cal. Rptr. 227 (1989) [cost of annuity]. Whatever the solution is, the wisest words may have been spoken on the subject by Justice Stevens writing for the Court in Jones & Loughlin Steel Corp. v. Pfeifer: “[B]y its very nature the calculations of an award for lost earnings must be a rough approximation. Because the lost stream can never be predicted with complete confidence, any lump sum represents only a ‘rough and ready’ effort to put the plaintiff in the position he would have been in had he not been injured.” 462 U.S. at 546. The “cost approach” portion of this article was written by L. Rachel Lerman Helyar, an associate with Horvitz & Levy LLP, an appellate law firm in Southern California. Telephone: (818) 995-0800. The “present value approach” portion of this article was written by Thomas Kallay, a sole practioner specializing in appellate practice in Los Angeles. Telephone: (213) 612-7717.

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