Be Prepared for Contingencies

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Published 10/04/2010

Contingency fees constitute one of the most frequently used alternative billing arrangements, especially in personal injury and collection matters, as a flat percentage of the value recovered for the client. They are particularly useful for the lawyer skilled at analyzing cases and accepting those with a high likelihood of success.

Our economy has been rocked to its very core. But what impact has it had on contingency law practices?

I didn’t give this any thought until a meeting with a client who is handling major contingency cases. His plight: The cost of funding these cases has gone up so much that he is financially strapped, and no costs can be paid from the fees generated by the matter itself unless and until there is a favorable verdict (an appeal would add further delay) or settlement.

What expenses are we talking about? There is the cost of labor, the attorneys and staff required to pursue the claims. After all, even without money/fees coming into the firm, people expect their salaries to be paid. Also inescapable are costs of operation such as rent, insurance and all the other items necessary to keep the lights on and doors open.

Another cost involves the expert witnesses that are engaged — the larger the battle, the more (and better paid) the experts. All these costs, one might say, are expected. But in large matters, one defense objective is delay, and thus the fight drags on, causing even greater financial strain on the plaintiff’s lawyers.

What is a plaintiffs’ attorney to do? There have been finance companies interested in lending on such cases, but this practice (akin to asset securitization lending on the presumed value of mortgages, which spurred the financial crash) may not be so prevalent in today’s tighter financial conditions.

In the well-known story of Erin Brockovich, Erin’s lawyer (an adversary of mine many years ago, incidentally) had to put a mortgage on his home to finance the case and ultimately had to associate with a larger law firm with a larger pocketbook.

Some large corporate firms have, in fact, tried to take on contingency matters. But that raises new problems. Normally, law firm compensation is based on hours worked and dollars collected. How can you compensate lawyers who bring no money into the firm, yet are responsible for many dollars flowing out, in the form of their compensation and expenses advanced to sustain the lawsuit?

If the firm is successful, who gets what? How much should the lawyers working on the matter receive? Isn’t the matter the “property” of the firm? Didn’t the firm — not the attorneys — advance the costs for working on the matter? What is fair?

Admittedly, the examination of contingency fees offers more questions than answers. If nothing else, these questions suggest that hourly rates as a billing mechanism have their advantages. Hourly rate alternatives are increasingly coming to the fore, and contingency fees are one of them. The attraction to clients is obvious: It offers them the assurance that their lawyer has “skin in the game.” But for the attorney, the line between “skin” and “skinned” can be a narrow one.

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