• July 23, 2012

In a normal “contingent fee” arrangement, a party’s lawyer receives no payment for her services on a legal matter unless the party obtains a financial recovery.

All lawyers know of these standard contingent fee arrangements as do most people in our society but many understand them to be limited to personal injury lawsuits, medical malpractice, or other niche areas of litigation that involve, speaking generally, less sophisticated plaintiffs, that is, less wealthy consumers of legal services who could not otherwise afford a lawyer.

Why?  Why is there a robust market in contingent fee work for personal injury litigation and the like, but not so much, more broadly, in litigation between businesses and wealthy sophisticated legal “players”?  

This was a Minnesota Litigator trick question (last Friday we posed another one).

There was some sleight of hand in the question posed.  After making the point that there is a common perception that contingent fee litigation is limited to personal injury-like work, the question posed was why a robust market for contingent fee work in business litigation does not exist.  That presumes that the common perception is the reality but it is not.

Smart businesses undertake contingent fee litigation all the time.

Having answered that, the follow-up questions are (1) why don’t people generally appreciate that a contingent fee arrangement may be appropriate outside of the stereotypical personal injury context?  (2) what’s so great about a contingent fee arrangement and how would a business know when such a deal is appropriate?

Why Don’t We Hear About Contingent Fee Business Litigation?

  • There are, of course, many (indeed most) business litigation cases today where a contingent fee arrangement is not used.  Therefore, a significant minority of such cases that are brought on a contingent fee are overshadowed.
  • In contrast to the stereotypical personal injury plaintiff, (a) businesses have more money to pay their lawyers’ hourly rates and, along with the bargaining power of “repeat business,” they can negotiate down lawyers’ hourly rates so the hourly rate arrangement might be more desirable in this “bizlit” context, (b) businesses have a greater tendency and ability for active involvement in and management of litigation so they are more able to “police” the hourly-billing lawyers’ legal strategy and legal “spend.” (Credit for these points goes here.)
  • There are many “hybrid” fee agreements — agreements with some contingent aspect like a “success premium” or the like — but these are often confidential, proprietary, individually negotiated, and outside the public view.

When Is Contingent Fee Business Litigation Appropriate?

    • The punishing legal bills that American businesses often complain about are often difficult (and sometimes, impossible) to defend.  Many private firm lawyers are under significant pressure to “bill hours.”  Their individual incentives are therefore, at least in part, in direct conflict with their clients’ interests.
    • Moreover, while lawyers are ethically bound to pursue their clients’ best interests and to exploit all available efficiencies to achieve the best results for their clients, the detail and complexity of our legal system can arguably justify exhaustive legal work, which is a purely subjective determination.  How good is good enough?  The answer requires the exercise of professional judgment and it is not easily second-guessed. So even if we give lawyers the benefit of the doubt as to their conscious motives, it is very difficult even for the most honest lawyers to determine the optimal sweet spot, the balance, of cost and benefit.  When in doubt, can they be blamed for committing themselves “to the max” to the quality of their work for their clients?
    • Put another way, if a manufacturer or provider were paid by the hour and the manufacturer or provider could expend a huge amount of time and effort marginally improving its product or services, at what point would the manufacturer/provider deem the product to be “good enough”?
  • In any case in which a client is uncertain of a recovery or uncertain as the magnitude of recovery, she should consider the possibility of a contingent fee arrangement.
    • A contingent fee arrangement shifts the risk of loss from the client to the lawyer.  (Maybe it shifts it too much?  Lawyers should consider provisions to protect themselves from a contingent fee client’s opportunistic conduct (such as settling a claim for a low dollar amount plus some non-monetary value or with a side deal like a discount on future purchases.))  (Credit for this point goes here.))
    • A contingent fee arrangement aligns the interests and incentives of attorney and client.  Contingent fee lawyers have no temptation to over-invest in cases and every incentive to optimally invest in them (that is, to maximize the recovery for plaintiffs and to minimize the liability for defendants).
    • The result is efficiencies not only to the client but also to the court system.  A great deal of the inefficiencies in and expense of our civil litigation system are caused by lawyers who make more money if they litigate more.  (Contingent fee agreements, incidentally, are apparently banned in the UK, as they are thought to lead to an increase in frivolous litigation. This makes no sense.  No rational lawyer will take a frivolous case on a contingent fee.  Allowing such agreements, however, results in a larger number of meritorious cases by virtue of the fact that it enables meritorious but poor litigants to take legal action.  It is hard, however, if one believes in our justice system to deem an increase in the number of meritorious cases to be a social ill.)

How Can You Have Contingent Fee Arrangement as a Defense Lawyer?

  • This question is covered here and in the following article:  Romualdo P. Eclavea, Validity, Construction, and Effect of Contract Providing For Contingent Fee to Defendant’s Attorney, 9 A.L.R. 4th 191 (1981).
  • As these articles point out, there is no reason why contingent fee arrangements must be limited to plaintiff’s counsel.
  • If, for example, the lawyer and client can agree on a realistic maximum risk, they could agree that the lawyer is paid a percentage of ever dollar of liability less than that risk (and nothing if that amount is exceeded).
  • It is clear that contingent fee arrangements on the defense side are far less common, that there is no standardization, and the cost and complexity of hammering out such deals might deter most lawyers and businesses from undertaking them.  There is also greater risk aversion among defense counsel than plaintiffs’ bar.

Does your business have a potential business claim that might best be handled with a contingent fee arrangement?  Call Seth Leventhal, LEVENTHAL pllc, for a free consultation ((612) 234-7349).

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