Contingent Fee Arrangements – Not Just for Plaintiffs Lawyers Anymore

The image most often associated with contingent fee cases is the late-night television commercial featuring a lawyer who proclaims to clients, “We don’t get paid unless you collect.” What the advertisements typically do not include is how much the lawyer keeps if he or she is successful.

Though contingent fee arrangements have been a source of great debate among the organized bar, the truth is that they are here to stay in one form or another. In the past they have been most often used in general plaintiff work, personal injury, medical malpractice, Social Security collection and other forms of civil tort litigation. In increasing measure, however, contingent fee arrangements of growing variety are finding their way into corporate America, both in transactional work and in litigation.

In law firms most contingency cases are first vetted by the originating attorney with the firm’s finance committee to weigh their potential risk and potential value. Will a case drag on for years? If so, will the payoff be enough to offset the time invested? After a case is deemed worthy, law firms then create “investment budgets” for contingent fee cases based on a sliding scale that establishes a correlation between a potential financial outcome and its probability. In short, the more probable the favorable outcome, the more a firm is likely to budget. The originating lawyer or lawyers then generally negotiate a draw based on a percentage of the revenue generated by the case; additional draws of lesser percentages are allocated to specific attorneys who join the project team. The balance — what’s left in the budget — is then allocated to the pool from which all partners secure a draw and distributed according to the firm’s overall procedures governing partner distributions. Despite what appears to be a fairly complicated process, both clients and lawyers are becoming more accepting of alternative billing arrangements. Clients generally view alternative billing practices as a way to predict and control costs while giving lawyers incentives to take more risks, as well.

Increasingly, corporate law departments want their outside counsel to share more of the financial risk and are thus willing to allocate higher returns at the conclusion of a matter for a lower fee structure while the case is pending. According to a recent survey conducted by the law firm Fulbright & Jaworski, in-house legal departments say their top concern is reducing the money they spend on legal costs. Lawyers, meanwhile, are creating greater margin growth by diversifying their methodologies for revenue creation.