How Will You Be Paying?

Blended hourly fee structure.

In a blended hourly fee structure, the client agrees to a combination of an hourly rate and a negotiated contingency. Typically, the pure contingent fee portion runs through dispositive motions and discovery and then converts to an hourly rate if the case does not settle before a certain date before the trial.

The appeal of this model to many clients is that it gives lawyers and law firms the incentive to reach a resolution more quickly, thus saving the company time and resources as well as protecting the client from potential fallout from protracted litigation. The value for the lawyer is that meaningful profits can be generated early in the process. Margins are not dependent on drawing out the process and accumulating thousands of billable hours, which is the unstated assumption underlying revenue growth in the pure hourly model.

Success-fee formula.

In this arrangement, a flat project fee is negotiated and then combined with a success fee based on parameters upon which the lawyer and client agree, such as a settlement above or below a certain amount or a transaction above or below a certain amount. This approach is very common in long-term relationships between lawyer and client, particularly when the law firm provides a good portion of the client’s legal needs.

Substantial cost containment and predictability are the value of this model for clients. Many law firms like this model because they can adapt their cost structure to these engagements, including hours, personnel and fixed costs, in a way that allows them to generate acceptable profit on the fixed-fee portion and substantial margin growth if the success fee is paid. This model, therefore, seems to work economically both for lawyer and client.

Pure contingency.

The pure contingency model is an arrangement that is increasingly acceptable to law firms. Corporations have long been open to it. The BlackBerry case portrayed quite vividly the gamut of issues that can arise in pure contingency cases in corporate litigation. The plaintiff, NTP, sued Research in Motion (“BlackBerry”) for patent infringement and sought to enjoin BlackBerry from using its patent unlawfully. Though NTP did not have an earning asset, it did own a number of patents that proved to be very valuable.

Before agreeing to the contingent fee arrangement, NTP’s counsel likely conducted substantial due diligence on the quality of the case, the validity of the patents and the investment of time it would need to make. In the end, given the more than $200 million payday, the gamble was worth it.

Clearly, law firm’s executive committees, finance committees and other internal groups associated with business planning have formulas and metrics that allow them to evaluate the risk represented by a given contingency fee case. Most of them include the following tools for evaluation: substantial research, return-on-investment index, success in comparable cases, the costs for allocating resources and an analysis of the time involved.

Obviously, the amount of time and effort a law firm is willing to invest in a pure contingency case is connected to what it estimates is the probability of success in that case. Most of the time, a pure contingency arrangement assumes that there is a great likelihood that the parties will settle, and thus law firms gamble that the very costly activities associated with lengthy discovery will not be in play.

Results billing.

Results billing is a less-common strategy but one that can allow an attorney to manage a client’s expectations in a case that might be more emotionally charged. In this model no portion of the fee is connected to risk. Rather, the client and the attorney negotiate a fee based on a gradation of different possible outcomes. Unlike contingent fee cases, results billing — sometimes known as “value billing” — assumes that results are often not uniform. One of the best matrimonial attorneys in the country once said: “Clients should pay for value and quality, not time. That’s why the practice of law is a profession, not a trade.”

Results billing requires an open and honest conversation between lawyer and client in which they agree on the objectives and the results of the engagement. Typically, the fees are then plotted on a “grid.” Frequently, the grid includes tangible targets, such as asset preservation, duration of the process, tax savings, penalties avoided and other results that can vary. This model is most common among small specialty firms that handle matrimonial law and intellectual property, as well as litigation boutiques.