Recent developments in the world of contingency fee business litigation and commercial arbitration

Bad news for Jeff Skilling

Former Enron CEO Jeff Skilling lost his most recent appeal to the 5th Circuit. He was originally sentenced to 24 years and $45 million in restitution. His convictions were affirmed, although he is still to be resentenced because of a sentencing enhancement that had been misapplied by the trial court. U.S. v. Skilling, ___ F.3d ___. 2011 WL 1290805, (5th Cir. 2011). Unless the U.S. Supreme Court agrees to revisit Mr. Skilling’s case again, it appears that he will remain in federal prison for a very long time.

Investors receive surprisingly large arbitration award.

According to The Wall Street Journal, Citigroup has been ordered to pay $54.1 million to two wealthy investors (a venture capital investor and a retired patent attorney) for losses they sustained on risky municipal bond funds that lost 77% of their value in the financial crisis. “The award by an industry arbitration panel is the largest ever levied against a major Wall Street brokerage in favor of individual investors . . . .” (Larger awards have been made to corporate investors.) The award included $17 million in punitive damages and $3 million in legal fees. Citigroup’s municipal bond funds are the subject of an SEC probe into whether the bank misled investors by failing to disclose the funds’ risks. The investors were neighbors, and the former Smith Barney broker testified on behalf of his former clients. Arbitration is mandatory in most Wall Street customer agreements, and this result appears to substantially exceed any previous award to individuals is such an investment advice dispute. It is good to see a case in which a FIRA arbitration worked out so well for the investors!

Lieck is out of luck!

The written contract for local counsel (Ed Lieck) provided that he would receive 10% of the first $50 million and 5% above $50 million of “recovered judgments awarded” in a lawsuit. As a result of an arbitration and settlement of a related action in Sweden, the lawsuit was dismissed. Local counsel sued for a fee. He wanted his percentages of the fair market value generated from the business deal. The trial court awarded him approximately $13.5 million. The appellate court reversed and he recovered nothing. The contract was unambiguous. Lieck was to get his percentage of “any and all recovered judgment(s) awarded in [the lawsuit].” The judgment in the lawsuit simply dismissed all claims and ordered each party to bear its own costs. Since the parties were awarded nothing, Lieck recovered nothing. U.S. Denro Steels, Inc. v. Lieck, ___S.W.3d___, 2011 WL 1252090 (Tex. App. Houston [14th Dist.] 2011). Whether fair or not, this appears to be consistent with the view that attorneys’ fee contracts will be construed like any other contracts, and possibly for a further view that they will usually be construed against the attorney.

Patent Infringement Litigation: Risks of Notifying the Infringer Before Filing a Lawsuit


           In “Patent Litigation – Four Steps to Patent Royalties,” the author suggests that after collecting evidence of patent infringement, the patent owner should “notify the infringer” before filing suit, because they “may begin to negotiate right away.” Not so fast. You may be about to have a suit filed against you in a court chosen by the defendant.

            In 2007 the U.S. Supreme Court decided  MedImmune, Inc. v. Genentech, Inc., 549 U.S. 118. The Court discussed circumstances in which the sending of a letter by a patent owner might present grounds for the recipient of the letter to file a suit seeking a declaration that, among other things, there is no infringement and the patent is invalid. Since the MedImmune decision, many cases have fine-tuned the circumstances in which a declaratory judgment action may, or may not, be filed. A recent post by Professor Lisa Dolak of Syracuse University (and a former Federal Circuit Law Clerk) provides an excellent summary of many of those cases. For example, a statement that the patent owner “does not intend to sue” is likely not sufficient to end the suit for declaratory judgment. Similarly, a stated “continued willingness to negotiate” might be useless in preventing or stopping the declaratory judgment action. 

            It is clear that MedImmune has altered the world in which a patent owner may safely initiate communication with a potential infringer or licensee of the patent. Before sending any letters, the patent owner should be working with patent litigation counsel to make sure that the risks of a hostile declaratory judgment action are carefully evaluated and a fully informed decision made about how to go about enforcing the patent.


Business Method Patents: Challenges for Patent Infringement Cases

As attorneys involved in patent litigation, our firm has received several inquiries lately about whether we might take, on contingent fee, a case for infringement of a business method patent.  The answer is “maybe!” “A business method is simply one kind of ‘method’ that is, at least in some circumstances, eligible for patenting.” Bilski v. Kappos,130 S.Ct. 3218 (U.S. 2010). Great care must be taken in evaluating such a case, however, because method patents are not broadly patentable.

Bilski made its way to the highest court via an administrative route rather than by private litigation. An applicant tried to patent a method of hedging risk in commodities trading in the energy market. The PTO rejected the patent, which was affirmed by the Board of Patent Appeals and the Federal Circuit (en banc).   The Supreme Court granted certiorari.            

Methods of doing business are not necessarily non-patentable. In Bilski, the claimed invention was a mathematical formula, an “abstract idea,” and thus not a patentable “process.” Significantly, however, the Court rejected any limitation that a method patent must satisfy a “machine” or “transformation” test. That is, a claimed process is not patent eligible only if: (1) it is tied to a particular machine or apparatus, or (2) it transforms a particular article into a different state or thing.  Although a useful tool, the Supreme Court held that the “machine or transformation” test is not the sole test for determining whether a method is patent eligible.   While the “machine or transformation” test might have worked well in the Industrial Age, it does not work as well in the Information Age.             

In the Supreme Court’s decision, four Justices concurred in one opinion (strongly disagreeing with the Court’s disposition of the case) and two in another (believing that business methods are not patentable). The Federal Circuit’s decision produced five opinions. This led Justice Kennedy to note, “Students of patent law would be well advised to study these scholarly opinions.”             

This has led some to suggest reexamination as an alternative to patent litigation or a license and that “defendants and potential licensees are using reexaminations more frequently than in the past to challenge the validity of the claims in issued patents.  So what’s the bottom line? Business method patents, while perhaps alive, will be difficult to successfully litigate by a plaintiff.   Perhaps the patent owner can best prepare his case for successful litigation by seeking re-examination himself before it is sought by a defendant, potential licensee or other third-party. We would be much more likely to take a business method case on contingency fee after the patent has survived re-examination in light of the substantial, though perhaps somewhat ambiguous, discussion of the higher and highest courts in Bilski.


Oops! Plaintiffs want a jury to award them money, but end up with arbitrators making them pay!


            This should be of interest to plaintiffs and attorneys who hope to conduct business litigation or arbitration with a contingent fee.

            Homeowners hired a construction company to build an 8000 square foot house, 2000 square foot guest house, pool and pool house, tennis court, pavilion and multi-car garage on their 12 acre property. The project was to cost $11.3 million. About 2 and ½ years into the project the builder stopped work, alleging the homeowners breached their contract by failing to pay for increased construction costs due to a design change. The homeowners claimed that the builder had delayed work and overrun costs. 

            The homeowners wanted the case heard in court. The builder wanted to arbitrate.  The case was ultimately heard by a three member arbitration panel.  The homeowners were ordered to pay the construction company $5.75 million in legal fees and arbitration costs.

The homeowners believed that they would have won with a jury and that the arbitrators were biased because they had formerly represented construction companies. 

            Obviously, it can matter a great deal to a contingent fee plaintiff whether his case gets tried by a jury or arbitrators. In either case, however, it is very important to pick the right audience, whether they are jurors or arbitrators!


Why not use a Board Certified lawyer?


            I just perused a lawyer’s website. His firm had several lawyers. He was from a small town, adjacent to a metropolis. He handled business litigation and probate litigation. His firm worked by the hour and on contingent fee. Then I noted the disclaimer: “He is not licensed by the Texas Board of Legal Specialization.”

            How do people find a competent trial lawyer? I suspect it is the same way they find doctors, dentists and other professionals – they ask a friend if she knows one! There are, of course, better ways, but most ordinary folks don’t know about them. That’s where the Board of Specialization comes in.

            Would you want a general practitioner physician to perform your heart surgery? Of course not. You would want a Board Certified heart surgeon. Then why would you want a non-board certified trial lawyer to handle your important patent or business litigation?   High hourly rates are not an excuse. If your case is right, you can probably get a highly qualified attorney to handle it on a contingent fee basis.

            Board Certification is a mark of excellence and a distinguishing accomplishment.Within the Texas legal community, Board Certification means an attorney has substantial, relevant experience in a select field of law as well as demonstrated, and tested, special competence in that area of law. There are more than 70,000 attorneys licensed to practice in Texas. Only 7,000 are Board Certified. 

           About 1100 Texas lawyers are Board Certified in Civil Trial Law. That is the specialized area that deals with litigation involving contracts, businesses and business owners, negligence, creditors and debtors, fair debt collection, landlord and tenant, and deceptive trade practices act. 

           You can easily find a Board Certified Trial Lawyer by going to the Texas Board of Legal Specialization’s on-line directory.  It has a "search" page. That allows you to search the database using a variety of criteria, including name, city, county, or zip code.  Alternately, call the TBLS at 800-204-2222, ext. 1454 or at 512-453-7266, or e-mail TBLS.

           It behooves you to insist on the best. Make sure your contingent fee lawyer is Board Certified in Civil Trial Law. Why do anything else? 

Bankruptcy Attorney Fees: Make them contingent


             A company files for bankruptcy. Millions of dollars are lost by unsecured creditors. There is no cash to pay lawyers to go after third parties. What do you do? 

            It’s simple. Find a competent firm willing to take the case on a contingent or hybrid fee basis. 

            Take theHeller Ehrman bankruptcy as an example. The 750-member international law firm filed for bankruptcy, in part it says, because its main two lenders -- Bank of America and Citibank -- refused to renegotiate the terms of a $5.7 million debt the banks say the firm owes as part of a long-term loan. 

            According to a recent court filing, the unsecured creditors' committee has asked the bankruptcy judge to approve the hire of a litigation firm for a pending case against Bank of America and Citibank. Under the proposed contract, the 11-lawyer firm would be paid $1 million up front, plus a contingency fee based on the net benefit to the estate if they win. “It’s BIG, You’re in Charge! Firm Picked for Pending Case Against BofA, Citi,” The Recorder, April 9, 2010. 

            When such a bankruptcy gets underway, counsel for the debtor should investigate potential claims against third-parties. They should then work with the unsecured creditors’ committee to search for special counsel – typically contingent fee business litigators who frequently represent plaintiffs against powerful companies. Once they negotiate a contract with the law firm that will undertake the case, the contract can be presented to the bankruptcy judge for approval. 

            Of course, the firm chosen for the task must possess entrepreneurial spirit and courage, as big third-party defendants such as B of A and Citi will have excellent counsel who are highly motivated by their substantial hourly fees. But such is the case in major, contingent fee business litigation. 

            In the end, it should be a win-win for everyone. Enough money may be generated to pay back all or part of what is due the unsecured creditors. Counsel for the debtor and the creditors will be heroes. The Court will be happy. The contingency fee lawyers, who get paid if they win, will be happy. The only unhappy people will be the third-party defendants who pay. 

            If the right lawyer agrees to take the case, it’s a no-brainer for the debtor and creditors!


"CYA," the corporate curse!

            When excellent lawyers leave big firms to become entrepreneurial contingent fee trial lawyers, they inevitably run into the “CYA effect.” This is the unfortunate tendency of many fearful General Counsel and corporate executives to hide behind a large, well-known firm in the event a case goes bad.   Such was the experience of Elizabeth Starrs and her partners described in “Starting a Litigation Boutique.” 

            How ridiculous!   It is frequently only the best lawyers who have the courage to strike out on their own. This may leave the bureaucrats and timid folk to handle these risky and important corporate cases.   The big firms tend to hire high-grade law graduates at high dollar prices. To justify their salaries, they charge high hourly fees for the tutoring of neophytes. A corporate client looks at the bill and sees many lawyers, of unknown experience and abilities, charging outrageous fees for too many hours and unnecessary work– all because the corporate employees who hired the large firm want to cover their derrieres. 

            Starrs found that this corporate tendency led her firm toward representing privately owned and cost conscious companies and individuals. We have had the same experience, and it has been most gratifying. We listen. We solve problems. We have incentive to be cost efficient. Our ability to be profitable requires us to find the most efficient path to the goal line. 

            Since “turning from the dark side,” we and lawyers like us now represent David instead of Goliath. This occurs in virtually all forms of business cases, including patent litigation, breach of contract cases and complicated arbitrations. Of course, the “CYA” folks could repent! They could easily find the best, most efficient, trial lawyers, not just the largest firms and motivated hourly billers. Will they? I doubt it.

            The best business people often leave large, cumbersome companies to go on their own. This is the era of the entrepreneur, in business and in law. General Counsel and corporate executives should have courage in seeking out the best lawyers for their case. After all, they were hired to do a job, not hide in the corner.


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. 

Court reprimands lawyer for unreasonable contingency fee

     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. 

"No Win No Fee": What Does It Mean?

     “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

Legal In-sourcing: The answer to the "Value Challenge."

     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!

Breath-taking Indeed--$180,000 Starting Salaries For Baby Lawyers

     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,”, 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.

Benefits Of The Contingent-Fee Agreement

       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:

This risk-sharing feature creates an incentive for lawyers to work diligently and obtain the best results possible. A closely related benefit is the contingent fee’s tendency to reduce frivolous litigation by discouraging attorneys from presenting claims that have negative value or otherwise lack merit.

     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. 

Lawsuit Defense Through A Contingent Fee

    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.


Patent Litigation On A Contingent Fee

            In  “Patent Payday,” (, 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.