21. Result-oriented fees
With billable hours, the lawyer expects to be paid regardless of the outcome. And the more expensive the legal services are to the client, the more profitable they are to the lawyer. The interests of lawyer and client are thus in tension.
One form of alternative billing is to try to give the lawyer and client a common set of interests. This involves giving the lawyer a material stake in an outcome.
The purest form of result-based arrangement means that the lawyer is paid solely as a percentage of a client’s monetary recovery. However, there are also other forms of result-based fee arrangements, such as outcome-related bonuses.
Contingent fees
The contingent fee — also known as “contingency” fee — is the “no-win/no-fee” type of arrangement that you see splashed across billboards and Yellow Pages ads. It is so common and well-entrenched in parts of the legal market that, arguably, it doesn’t really count as “alternative.” But it is an “alternative” in the sense that it doesn’t utilize the billable hour.
In its classic form, a lawyer takes no fee whatsoever unless the client obtains a monetary recovery. If there is a recovery, the lawyer takes a percentage.
Probably the main reason why contingent fee billing has remained strong over the years is that it principally targets the sector of the market that usually can’t afford to pay by the hour. Indeed, as the cost of civil litigation has risen, the contingent fee’s advantages have become even more obvious.
The contingent fee is most common in personal injury, wrongful death, and employment cases — the areas where people on “ordinary” incomes are most likely to be involved in litigation and where, typically, there is insurance money on the defense end, meaning that a judgment is likely to be paid. That said, it sometimes also features in commercial litigation.
The origins of the contingent fee
The contingent fee is much older than the billable hour. It goes back to the nineteenth century. And although different legal historians have reached different conclusions about when it began, there is evidence that its use extends back to the early part of that century. (The History of Contingency and the Contingency of History, Stephen Landsman, DePaul Law Review, Vol. 47, No. 2, 1998.) By contrast — and as noted earlier in this book — the billable hour came into being in the second half of the twentieth century.
As one scholar has argued, the contingent fee’s deep historical roots cast doubt on three criticisms directed against it: (1) That it is a product of the late nineteenth century development of the modern tort system (and hence a fit target for tort reform); (2) that it is a partisan mechanism designed for a society riven by labor strife (and thus unnecessary in a more peaceful and prosperous era); and (3) that it is simply part of modern-day ambulance chasing.
Rather, the deep roots of the contingent fee highlight its association with the strongly felt American desire to ensure access to courts for both rich and poor alike. This approach was reflected in the Sixth Amendment’s guarantee of the right to counsel, in the various due process provisions of the Fifth Amendment, and in the rejection of the British rule requiring the loser to pay the winner’s attorney fees in most civil litigation.
However, the contingent fee is a much more recent development elsewhere. In Britain — where it is known as the “conditional fee” — it did not become permissible until 2000. Traditionally, “no-win/no-fee” schemes were regarded as “unprofessional” in Britain and prone to encourage litigation. Eventually, those views became discredited. What is surprising is how long that took to happen.
While discouraging “unnecessary” litigation may be a legitimate public policy, it seems absurd to forbid a type of fee arrangement on the grounds that allowing it would result in more lawsuits. If one doesn’t like lawsuits, the underlying laws should be changed. It makes no sense to outlaw particular types of fee arrangement to discourage citizens from asserting rights under laws that do exist.
Contingent fees and case screening
For obvious reasons, contingent fees are associated with the plaintiff side of lawsuits — it is the plaintiff that stands to make the monetary recovery, a percentage of which can be shared with the lawyer.
Contingent fees are, indeed, sometimes associated in the public perception with trigger-happy lawyering by the plaintiffs’ bar. They tend to get mixed up with the so-called “frivolous lawsuit” (to use a term much favored by certain politicians as well as business and insurance interests eager to promote tort reform).
In fact, that association is unfair. The lawyer who takes a case on a contingent fee has a much stronger personal interest in ensuring that it is viable than one who is going to be paid by the hour no matter what the result. And the most accomplished contingent fee lawyers are very selective about the cases they take and skilled in the art of screening them.
Why contingent fee windfalls are necessary
Contingent fee billing meets a great need. Without it, many people with legitimate grievances would never get their day in court. But it comes at a price. In order for lawyers to offer contingent fees, there has to be a prospect of a sufficiently large recovery that compensates for the risk that they might not get so much as a bean for their services.
To put it another way, a successful contingent fee lawyer has to make windfall amounts on some cases — more than would be earned by the hour — in order to cover others where there is no recovery.
Inevitably, this can breed resentment when a lawyer makes, say, 40 percent on a $500,000 settlement relatively early in a case. That gives the impression of being exorbitant. And, looked at in isolation, it is.
But the client is, effectively, subsidizing other cases that the lawyer took on and lost. Without this subsidy, the lawyer wouldn’t have been in a position to take on the case that did lead to the recovery. At least, that’s the theory.
The subsidy also extends to cases that go to trial and are won, but where the time investment is grossly out of line with the contingent fee received. Many cases on a contingent fee do not “pencil out” if taken to trial, even if there is some recovery.
Because contingent fees can lead to windfall amounts for the lawyer, those who are in a position to pay their lawyer — rather than having the lawyer assume the risk of the case in return for a cut of the action — may be better off ponying up the money. That said, there is something inherently appealing about the “no-win/no-fee” approach that makes it attractive even to those clients who are in a position to pay and even when it may not be wholly rational. Perhaps it is, in part, to do with getting away from the billable hour.
Problems with contingent fees in smaller cases
Unless the potential amount of damages is sufficiently large, it may be uneconomical for a lawyer to litigate a case on a contingent fee. For example, if the largest possible recovery is, realistically, only $20,000, a contingent fee is not going to yield more than around $8,000 at best — and there is only so much lawyering that can be expected for that amount, whatever the billing method.
Some lawyers do take on contingent fee cases where the damages potential is relatively low. However, they tend to have an incentive to settle them early — even if this means a substantial reduction on what the case might theoretically be worth if litigated somewhat longer.
For example, if a lawyer can earn 40 percent of $10,000 by settling a case very early on, it can be a lot more efficient than going potentially the whole way in the lawsuit in the hope of getting 40 percent of $20,000.
In some ways, this gives the attorney a conflict of interest with the client. The attorney has an incentive in obtaining a fee in the most efficient way (which isn’t necessarily a matter of going for the largest fee by doing a lot more work); the client, by contrast, really just wants the largest recovery.
That said, if it wasn’t for the contingent fee system, the client might not have an attorney at all. And settlement early in a case eliminates the risk that, by litigating longer and harder, the client might lose — meaning that there would be zero recovery.
Mitigating the effects of contingent fees
There are ways of mitigating the effects of the contingent fee. One is to have a scale of percentages depending on the time at which a case settles or is decided. For example, an early settlement could result in a smaller percentage than a win in front of a jury. However, if too much of the “windfall” factor is removed, the lawyer may feel that there is an insufficient upside to rationally justify the downside.
Outcome-related bonuses
Although the purest form of contingent fee is the no-win/no-fee version in cases where the goal is to obtain a money judgment, one can devise any number of variations and hybrids. These include fee agreements where there is some underlying guaranteed fee — which could be a flat fee or (if you must) an hourly one — that is topped up with a bonus depending on the outcome.
These types of arrangements are still “contingent fees” in a literal sense, in as much as the amount that is paid is contingent on what happens. However, the term “contingent fee” tends, in practice, not to be used to describe bonus arrangements and generally refers to the “no-win/no-fee” variety.
Some clients like outcome-conditional bonuses, because there is an added incentive compared with a fee system in which the lawyer doesn’t share in any of the fruits of a successful outcome.
There might be something in that. Personally, however, I find that I work in the same way regardless of incentives. I’m happy to accept a bonus for a successful outcome. But I don’t find that the presence of such a bonus arrangement in any way affects the quantity or quality of work I do on a case.
Where a lawyer should be careful is in accepting bonus arrangements under which the fee-plus-bonus total is simply equivalent to a normal rate for the job. If that is what it amounts to, the lawyer isn’t so much earning a “bonus” for a successful outcome as suffering a “penalty” for an unsuccessful one. There’s nothing inherently wrong with that, but just be aware of what you are agreeing to.
Outcome-related fees linked to nonmonetary outcomes
One can also have contingent fees and other outcome-based arrangements that relate to some result other than a monetary recovery — the enforcement of a contract or property right, for example. Here, the fee would need to be fixed in advance, because it couldn’t be expressed as a percentage of anything.
That said, contingent fees linked to nonmonetary outcomes can be tricky, because it isn’t always easy to define whether a particular goal has been achieved. Whereas with monetary outcomes, the result is pretty clear-cut, nonmonetary results can be a bit fuzzy.
For example, one could have a situation where a goal was virtually achieved, but not quite — even though what was accomplished wasn’t at all bad. It would be unfair for the lawyer to miss out on a fee. Other forms of alternative billing may make more sense in such a circumstance.
Defense-oriented contingent fees?
Contingent fees are generally associated with the plaintiff side of lawsuits. However, one can devise defense versions as well. That is especially so if the goals are nonmonetary — for example, “I will pay you a fee of $30,000 if you ensure that my neighbor does not get an easement across my land.”
In theory, one could also have a defense contingent fee linked to a monetary outcome. For example, a lawyer defending a case could — if successful — be paid a percentage of whatever was considered the “exposure” in the lawsuit. Thus, if the exposure were $1 million, the lawyer would be entitled to, say, 30 percent of that amount in the event that the plaintiff recovers nothing. For every dollar in damages paid to the plaintiff, one dollar would come off the fee.
The obvious flaw in that example is the difficulty of establishing the “exposure” amount on which the percentage would be based. Also, the risk is that a lawyer would lose any incentive to perform if — during the course of the litigation — it became clear that there would be a recovery that would wipe out the fee, even though there was still much to fight for in terms of how large the damages would actually be. Maybe this could be addressed if the arrangement were set up so that for each dollar of damages, something less than a dollar came off the lawyer’s fee — so that the lawyer and client were, in effect, splitting the damage.
So that type of contingent fee is not without problems, although there may be ways of working around them. But I offer it as an example of how there is scope for creativity in fee setting. Rather than always working off fee-agreement templates, lawyers and clients should spend more time working out customized arrangements for specific cases. In some instances, a one-of-a-kind agreement can be the best type.
Entire contents © 2008 John Derrick