Why don't more hourly-billing lawyers take on contingent fee cases?

              In the Wall Street Journal’s Law Blog dated March 29, 2010, Ashby Jones asks whether there are any takers on the strategy of mixing a traditional hourly fee practice with a contingent-fee business. 

Most firms do not take plaintiff's contingency fee cases because they are risk averse. They lack the entrepreneurial spirit. I've seen it time after time. Many lawyers on the hourly side think it is easy to make loads of money during contingent litigation. It is not. It requires huge investments of lawyer time and borrowed expense money. For the same reasons that some people work for corporations and other are entrepreneurs, some lawyers and firms are cut out for hourly work and others are willing to risk everything. No risk, no reward. 


            For a lawyer to be successful with a contingent fee case, three things are necessary.  First, there must be a reasonably good case for liability. Second, there must be significant damages. Third, the defendant must be able to pay a judgment.


            Even if all those things are present, the case must survive inevitable legal challenges by the defense, including motions for summary judgment (to prevent the case from even reaching the jury) and appeals. Years can pass, and millions of dollars in lawyer time and case expenses will be repaid. And after all is said and done, the lawyer might lose and have to pay back a line of credit. It is not a business for the weak or fearful.


            Many of our contingent fee clients are true entrepreneurs. Even if they are doing business as a corporation, they are risk-takers. They appreciate that their lawyers have their own “skin in the game.” Businessmen and lawyers who will not take risks need not apply! 

Contingency Fee Representation: When the lawyer's fee exceeds the amount in dispute.

             All too often, legal fees eclipse the amount in dispute in the lawsuit.  Why is this?  Typically, the culprit is hourly billing.

            I recently saw an editorial in the Houston Chronicle entitled “It’s time to reconsider how lawyers are trained.  It is written by James Parsons, a staff attorney with one of the Texas Civil District Courts in Houston. 


            Parsons correctly notes that too often the legal process begins by billing rather than problem solving.  I see it in my practice all the time.  The plaintiff’s lawyer, on a contingency fee, has an incentive in getting to the goal line as quickly, efficiently and inexpensively as possible.  The defense attorney, if billing by the hour, wants to do the opposite.  His incentive is to turn over every rock, scorch the earth, and “defend” every issue possible.  If it can be done, it must be done.  After all, he gets paid for every hour worked, not by the result he obtains.


            Why not just solve the problem?  Communicate.  Listen to the other side’s point of view.  As Parsons suggests, employ the skills of teamwork, communication and leadership.   Good defense lawyers should not ask “how can this case be defended.”  Rather, they should ask “how can this plaintiff’s problem be solved.”


            Sometimes the problem can be solved with a simple apology.  Other times a business deal will do the trick.  If it’s more complicated, however, and litigation or dispute resolution is necessary, then try to identify the points where the parties agree and just fight about the rest. 


            Agree on as many facts as possible.  Narrow the issues down to the real dispute.  Conduct only the minimum necessary discovery.  Get an early trial setting and let the decider decide.   Don’t focus on how to obfuscate, obliterate and litigate.  Instead, focus on communication, understanding and resolving.


            The contingent fee lawyer wants to do that.  Clients would be happier if hourly billing lawyers did the same.


Lawyer awarded real estate from contingency fee agreement

        The recent case Ferguson v. Strutton involved claims for the partition of several pieces of real estate.  The client retained her attorney through a contingency fee contract which entitled the attorney to “thirty-three and one third percent of whatever may be recovered, whether in money or property, or whether recovered through suit or compromise.” 

         The client settled her case and received 338 acres of the land.  She originally offered her attorney a specific parcel of property as his fee, but then changed her mind and gave him nothing.  He sued and was awarded $135,804.06, an amount equal to one-third of the appraised value of the 338 acres. 


        The Missouri court of appeals reviewing the case reversed the award for money.  It held the fee contract expressly provided the attorney one-third of whatever was recovered and, because the client’s recovery was real estate, the attorney’s fee was therefore “an undivided one-third interest in the property recovered by the client as a result of the settlement of the partition suit.” 


        Every person who wants to hire an attorney should know that the amount and method of the attorney’s payment is negotiable.  The attorney and client in the Ferguson case agreed that the attorney would receive one-third of whatever the client received.  In this case, it happened to be real estate.


Contingency Fee Representation: Hourly fees contingent on winning.


            We all know that many clients cannot afford to pay the hourly fees of a good lawyer.  In a plaintiff’s case, if there is a good argument for liability, the potential damages are substantial and the defendant can probably pay a judgment, some lawyers will take the case on a contingent fee basis.  That is, the client pays a percentage of what is collected.  No recovery – no fee.  This arrangement is common in personal injury cases and sometimes in business cases.


            Similarly, some defense cases can also be handled on a contingency basis.  If the plaintiff’s demand is much higher than the value of the case, and if the defendant can afford to pay, a “reverse contingent fee” may be possible.  The lawyer receives a percentage of the savings between the plaintiff’s demand and what the defendant ultimately has to pay.


But what about cases where those requirements are not met?  Suppose the client has a plaintiff’s case with good liability, the defendant can pay, but there are small or nominal damages?  If the law allows a successful plaintiff to recover attorneys’ fees, a contingent fee representation may still be possible.


Take, for example, In re Thompson, Bankruptcy No. 08-02560, United States Bankruptcy Court, N.D. Illinois, Eastern Division, March 19, 2010.  Mr. Thompson was in bankruptcy.  GMAC wrongfully repossessed his car, in violation of the automatic stay under 11 U.S.C. § 362.  Like most folks in bankruptcy, Mr. Thompson had no money to pay lawyers to go after GMAC. 


The law provides, however, that an individual injured by a willful violation of the automatic stay may recover "actual damages, including costs and attorneys' fees.” 11 U.S.C. § 362(k)(l).   Importantly, the debtor need not have actually paid the fees before they can be recovered. Recoverable fees can even be contingent upon the attorneys' success in the litigation!


The Thompson Bankruptcy Court suggests how a fee contract can be written to allow this.  The Court says that the parties may enter into a clear written agreement providing that the fees are to be due from the client, but contingent upon success of the matter and collection from the defendant.   Don’t say that the lawyer “waives” the fee.  The client must be obligated to pay the fee, although that obligation may be conditioned on collection from the defendant.


            Sometimes a case can be funded with a business arrangement.  For example, our firm once defended a “David” business against potentially ruinous litigation by a “Goliath” corporation trying to stop David from competing.  Although “David” could not afford to pay us during the litigation, we won the lawsuit, “David” was acquired by a much larger corporation, and we were then paid for our work.


            In other cases, a lawyer might agree to handle litigation for a business, whether as plaintiff or defendant, in exchange for an equity interest in the business.  There are numerous other creative ways to accomplish the same result.


            So, don’t assume that you cannot have competent lawyers merely because you can’t pay their hourly rates.  Whether you are a plaintiff or defendant, where there is a will there may be a way.