Contingent Fee Business Litigation Blog : Houston Patent & Contingent Fee Business Litigation Lawyer & Attorney : McClanahan Myers Espey Law Firm : Intellectual Property, Commercial Litigation

     Every person who wants to hire an attorney should know that the amount and method of the attorney’s payment is negotiable. But there are limits to what an attorney can charge.

     The American Bar Association’s Model Rules of Professional Conduct state that “A lawyer shall not make an agreement for, charge, or collect an unreasonable fee or an unreasonable amount for expenses.” State bar associations have adopted this restriction and Indiana’s version of the rule was recently addressed by its Supreme Court.

     On June 12, 2009, the Indiana Supreme Court assessed a public reprimand against an attorney for charging an unreasonable fee. The fee agreement at issue called for an hourly rate of $75 per hour plus 50% of the amount recovered. Interestingly, the Indiana Supreme Court did not actually rule that the fee agreement was unreasonable. It instead accepted the parties’ stipulation that making an agreement to charge a client a 50% contingency fee in addition to an hourly fee was a violation of Rule 1.5(a) of the Indiana Rules of Professional Conduct when it assessed the reprimand. 

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     “No Win No Fee” is a general reference to a contingent-fee agreement. A contingent-fee agreement is a contract between an attorney and client that describes how the attorney is to be paid for his or her work. Under a pure contingent-fee agreement, the attorney receives a fee only when the contingency is met—usually when the client recovers money from the opponent. Thus, “no win no fee” is an apt description. Without a recovery for the client, no fee is owed to the attorney.  It may also be referred to as a "success fee."  

     Except when prohibited by law (such as in criminal defense or some family law cases), contingent-fee agreements can be used in a variety of situations. It is important for the client to understand that, like most contracts, the terms of a contingent-fee agreement are negotiable. Negotiable terms may include the work the attorney is expected to do, the attorney’s percentage of the recovery, who will advance the case expenses, how those expenses will be subtracted from the recovery, and how any non-cash recovery will be valued. Because these terms are negotiable, the client who is shopping for legal services may want to have a disinterested attorney review the proposed contract to ensure that it meets the client’s needs.

     For more information this topic, please contact any of the firm’s partners at mmellp.com.

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     I'm not a member of the Association of Corporate Counsel because I'm not an in-house counsel.  I am an advocate for affordable litigation, however, and I was delighted to learn from my friend Steve Matthews about the ACC and its "Value Challenge."  The challenge states:

“ACC believes that many traditional law firm business models and many of the approaches to lawyer training and cost management are not aligned with what corporate clients want and need: value-driven, high-quality legal services that deliver solutions for a reasonable cost and develop lawyers as counselors (not just content-providers), advocates (not just process-doers) and professional partners.” 

     I totally agree.

     My firm advocates a litigation staffing model that answers the Value Challenge head on. In our website, we propose a solution that helps a company reduce the cost of litigation by bringing as much work in-house as possible. We call it “in-sourcing.” Forbes Magazine recently ran an advertorial about it. 

     The idea is that even in complicated cases, what the client really needs is the right trial lawyer in the courtroom. Much of the work that causes litigation to be so expensive, such as discovery, document review and production, and motion practice, can be handled in-house, by the client's own employees.

     In traditional hourly billing, everything is done by outside counsel and their staffs at very expensive rates. Starting salaries for baby lawyers are now as high as $180,000. Why should a corporate client pay hundreds of dollars per hour for the “education” of such lawyers at tasks that can be done better and cheaper by corporate employees?   The incentive should be efficiency, not opportunities for more hours and higher billings.   Outside counsel often charge millions of dollars to handle a single case. Is that really necessary? Certainly you need the right trial lawyer in the courtroom and to supervise your in-house staff on the case. But you don’t need all the extra baggage that usually comes with the services of a top-tier trial lawyer. 

     Unfortunately, we are not yet past the days of scorched-earth discovery and litigation tactics. Some litigants, encouraged by their hourly-compensated lawyers, refuse to play by society’s rules and get caught. A litigant and its outside counsel were recently sanctioned $4.3 million for “abuse of advocacy” in a patent case. Earlier this year that same litigant and a different firm were assessed $10 million for “misbehavior” in disregarding claims construction.  The Value Challenge sets a higher standard.

     So let's look at the Challenge again. What do corporate clients want and need?

“Value-driven, high-quality legal services that deliver solutions for a reasonable cost and develop lawyers as counselors (not just content-providers), advocates (not just process-doers) and professional partners.” 

     That’s what “Legal In-sourcing” does. Just hire what you need. Do everything you can in-house.  Get a high-quality, top tier trial lawyer.  Let him or her lead your in-house team one case at a time. Use his partners and staff only as necessary. Nurture talent and develop experience in-house. Use in-house staff to locate and produce documents, review documents produced by your opponent and make coding entries into trial software programs. Conduct legal research in-house. Write initial drafts of the motions, responses and briefs in-house. Take the routine depositions in-house. Use the trial lawyer and his staff only as necessary. We know that most cases get resolved before trial. Most of the labor-intensive work that is done before trial can be done in-house.

     The lead trial lawyer must, of course, remain involved at all times, but as a supervisor, not as a provider of the labor pool. This makes him and his firm true “professional partners” with the in-house staff on a case by case basis. 

     What does all this get the corporate litigant? Value-driven, high-quality legal services that deliver solutions for a reasonable cost, and develop in-house lawyers as counselors, advocates and professional partners. 

     At our firm, we call it “Legal In-sourcing.” It answers the “Value Challenge” perfectly!

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     How many litigants are willing, even if able, to pay high hourly rates so that big firms can pay “breath-taking” starting salaries to baby lawyers? According to the American Bar Association Journal, first-year law associates are being paid starting salaries as high as $180,000 per year. “As Economy Stalls, So Do Salaries … But Not Associate Hours,” ABAJournal.com, September 29, 2008.  And as those lawyers mature, their rates go up, not down. Guess who pays for that! Clients do.

     Perhaps that is why the average cost of a patent infringement lawsuit in Texas was $2,637,179 in 2005. “Report of the Economic Survey,” American Intellectual Property Law Association 2005, at p. I-109.  The little guy can’t afford to play in that league. Indeed, even some larger corporate litigants are saying “enough” to continually escalating costs of litigation.

     As a former chairman of the Court Costs and Delay committee of the State Bar of Texas, I have been concerned about controlling the high cost of litigation for more than two decades. That is why our firm handles patent and other complicated commercial litigation on contingency fee. The little guy has access to the legal system. The big guy keeps its costs down. The law firm, not the client, bears the cost of paying the lawyer salaries.   In the event of a “breath-taking” result, the client and lawyer share in the recovery. Law firms may choose to pay breath-taking salaries if they wish, but it should not be at their clients’ expense.

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       Under a typical contingent-fee agreement, the "contingency" is usually the recovery of money, or something of value, for the client. If that contingency does not occur, the client owes the attorney nothing for his effort. The obvious benefit to the client is that he or she does not have to incur an out-of-pocket expense for attorneys’ fees. This may be particularly valuable to a client who does not have the ability or desire to pay an attorney by the hour to advance the client's case.

       The contingent-fee agreement also benefits the client by effectively spreading the risk of litigation. An hourly-rate payment agreement requires the client to assume all of the risk because the attorneys’ fees are a sunk cost. But under a contingent-fee arrangement, the attorney shares that risk and is only paid a fee if he wins the case or obtains a settlement. The Texas Supreme Court recently described the benefits of contingent-fee agreements when it wrote:

     Finally, the contingent-fee agreement has an implicit benefit for the client.  The arrangement ensures that the attorney believes in the client's case and will do the work necessary to obtain a positive result. Faith in the case and the desire to fight for the client may not always be present when attorneys are guaranteed payment—without regard to the success or outcome of the case.  A client who retains an attorney through a contingent-fee arrangement therefore receives the attorney's implicit belief that the case has merit. 

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    Most people have some idea about how a contingent fee works in a plaintiff’s case. Say you are injured in a car wreck. You find a personal injury lawyer. He advances the case expenses and gets paid a percentage of the money received in a settlement. "No fee if no recovery." This same idea works in complex business lawsuits. If a small business or entrepreneur lacks the money to pay lawyers by the hour, there are firms, like ours, that will take even expensive, complicated, business cases on a contingent fee. This helps level the playing field and gives the little guy access to justice.

       But what happens when the little guy gets sued and has to defend himself? What happens when Goliath sues David?

       Well, there are some options.

• David might assign part of his company, invention or assets to an institutional investor who will pay for the defense.
• David might assign part of his company, invention or assets to a law firm that will undertake the defense.
• David might have a counterclaim that a contingent fee lawyer would assert, and include defense of Goliath’s claim as part of the representation.
• David might find a lawyer willing to defer payment of an hourly fee until David is able to pay.
• David might use a "reverse contingent fee."

    Blawgletter Barry Barnett gives some excellent examples in "How to Negotiate a Reverse Contingent Fee."

    Sometimes David can defend against an attack by Goliath by using a combination of these techniques. In one case, I was asked by a small medical device manufacturer to defend it in a "bet the company" patent infringement and unfair competition case. The plaintiff, Goliath, was a huge company, well-funded, and was represented by two large and very able law firms. Goliath wanted to stomp out David like a bug! We looked to see if David had an antitrust counterclaim, but that didn’t work out. David was able to pay some of the trial expenses (such as jury consultants and trial graphics) but we worked "by the hour" hoping that if David could survive, we would somehow get paid.

       The case was tried to a verdict. David won. Goliath’s stock lost half its market cap ($1.5 billion) overnight! We were patient about getting paid. David merged into a large European medical device company, and we were finally paid for our work. It was a win-win, and we were very proud to have helped save the day!

       As Barry explains,

By way of example, if the law firm and client agree that a patent infringement case exposes the client to potential liability of $10 million, the RCF would equal a percentage -- 40 percent, say -- of the difference between $10 million and any lower amount that the client pays in settlement or as a result of a judgment. If we zero out the plaintiff, our fee totals $4 million -- .4 x ($10 million - $0) = $4 million.

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            In  “Patent Payday,” (Forbes.com, 2/12/08) Nathan Vardi discusses institutional investors such as Rembrandt IP Management, Altitude Capital Partners and NW Patent Funding that have raised capital to acquire and enforce patent rights. One of the investors, Michael Cannata, sees such funds as leveling the playing field in David v. Goliath battles. He is right.

            According to the 2007 American Intellectual Property Law Association’s “Report of the Economic Survey,” the mean (average) cost of a small patent infringement case in Texas is approximately $3,000,000 through trial! Most individual inventors and entrepreneurs do not have the money to pay hourly lawyers such fees to enforce their rights. Some law firms, including mine, have the ability to take a patent case on a contingent fee, where we advance the case expenses and receive a fee only if we achieve a settlement. Without the institutional investors and contingent fee lawyers, however, the little guy would be simply out of luck in trying to enforce his patent rights. 

            Mr. Vardi mentions pending legislation in the U.S. Senate, pushed by large technology companies, to limit the rights of plaintiffs and make litigation even more expensive. The intent of such legislation is obvious. If the price of admission to the playing field can be made so high that only the big companies can afford to play, the smaller companies can either be litigated to death or acquired on the cheap.

            If the institutional investors can help insure access to the court system by all, then more power to them! They, together with contingent fee lawyers like my firm, can indeed level the playing field.

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