Part of finding the right lawyer involves asking questions about the types of fee agreement that law firm offers. Most people are familiar with hourly fee agreements, but the options actually go well beyond that. This article addresses the different types of fee arrangements; considerations for retainers and litigation costs; and the sometimes difficult process of budgeting for litigation fees and expenses.
Alternative fee arrangements (AFAs) are negotiated fee agreements between clients and attorneys that allow the clients to pay for legal services other than by the traditional billable hour. Types of AFAs include contingent fee agreements, hybrid fee agreements, flat or fixed fees agreements, do-not-exceed agreements, reverse contingent fee agreements, success fees, and numerous variations on the above.
AFAs are a method of allocating the risks and rewards of litigation, and can work well for both clients and law firms in appropriate cases. If done right, the law firm’s fee should reflect the value the client receives from the representation, as opposed to the time the law firm spends on the case, while still allowing the law firm to make a profit. An effective AFA aligns the client’s interests and the law firm’s interest.
To be successful, an AFA must benefit both the client and the law firm. Some clients like AFAs because such agreements can help clients better manage their budgets and financial risk by sharing with their attorneys both the risks and the rewards of a lawsuit. Ogborn Mihm likes AFAs because by assuming some of the risks, and betting on our skills and experience as trial attorneys, we have the opportunity to make more money than we might earn billing the client by the hour. We also appreciate the freedom that AFAs permit when we don’t have to worry that everything we do on a case is going to cost the client more money. AFAs permit creativity and unusual strategies that the client might not otherwise be able to afford.
For clients who are individual people, families or small businesses, contingent fee agreements or other AFAs may be the only way that the clients can obtain access to the courts.
An hourly fee agreement is a contract between a client and the law firm wherein attorneys and para-professionals charge the client by the hour for legal services. Each attorney, paralegal, or legal assistant who works on a case records his or her time for each task. After the end of each month, the firm prepares an invoice to the client for the legal services provided during the previous month. The law firm multiplies each timekeeper’s billable hours by the person’s hourly rate; it then makes adjustments if it feels that a person has not been efficient with a particular task. The firm then charges the invoice against the client’s retainer funds deposited in a trust account, or sends the invoice to the client for payment.
A contingent fee agreement is a contract between the client and law firm in which the client’s requirement to pay the law firm an attorney fee is dependent on the law firm recovering a settlement or judgment for the client. The client is not required to pay for the law firm’s legal services unless the law firm is successful in recovering money for the client. The law firm’s fee is usually a percentage of the recovery. If we lose the case, then the client does not pay us a fee and is usually responsible only for the litigation costs.
In the right cases, both the law firm and client can benefit from contingent fee agreements. The firm and the client rise and fall together.
Some of Ogborn Mihm’s business clients also like contingent fee agreements because the agreements enable the client to better manage budgets and risk. Contingent fee agreements provide access to the courts for individuals and companies who could not otherwise afford to litigate. Depending upon the type of case, in some circumstances even very financially successful people or businesses could not afford to pursue a lawsuit without a contingent fee agreement or some other alternative fee arrangement.
Lawyers price for risk. Thus, contingent fee percentages vary from case to case depending upon the nature and complexity of the matter. For less complex cases, such as simple breach of contract or personal injury case, contingent fee percentages range from 25% of the recovery — usually if the case is settled pre-suit — to 33 1/3% of the recovery if the case is settled after filing suit. For more difficult and high-risk cases, contingent fee percentages may be 40% to 45% of the recovery. If a firm has to take the case on appeal or try the case a second time, the percentage may be higher.
Depending upon the case, some law firms will occasionally agree to “stair-step” the contingent fee percentage, so that the contingent fee percentage increases depending on the stage of case as it approaches trial.
Law firms may be very selective with contingent fee cases and likely do not accept every case that comes through the door. A lawyer must believe in the case and be willing and able to fully prepare and take the case through a trial. Thus, they carefully analyze all potential contingent fee cases before agreeing to take a case.
With some complex legal and professional malpractice litigation cases, often involving byzantine tax, intellectual property, or business transactions, clients will hire Ogborn Mihm on an hourly or fixed fee basis to analyze the case. We may hire consultants to help us with the analysis. By investing a relatively small amount of money up front, the client can make an informed decision about whether to proceed with the lawsuit, and we can make an informed decision about whether we want to accept the case on a contingent fee or other alternative fee arrangement.
As a firm, we do not accept contingent fee cases with the hopes of a quick settlement and without plans to take the case to trial.
Many strong cases do not lend themselves to contingent fee agreements for a variety of reasons. For example, if a lawyer is defending a company in a business lawsuit, a good result for the client may be a win at trial or an order granting a motion for summary judgment. The good result is that the client does not have to pay a judgment or settlement. Despite the good result, such a result creates no fund from which the lawyer can collect a contingent fee, so a contingent fee agreement would not be appropriate in such circumstances. However, such a case may be appropriate for a reverse contingent fee agreement or other alternative fee arrangement.
Moreover, even if a case is suitable for a contingent fee agreement, a law firm must carefully manage its resources and cash flow. Thus, lawyers may not accept contingent fee cases where they believe that the case will be so demanding as to interfere with their ability to represent other clients or pay overhead during the case, or where the potential return on investment of time and money will not justify the risk. In such circumstances, a lawyer may represent the client on a traditional hourly fee basis, a hybrid contingent fee-hourly fee basis, or with other AFAs. Lawyers and law firms may also partner with other law firms to spread the risk and the reward.
Reverse contingent fee agreements are generally used when a client is a defendant in a lawsuit and has a clearly defined financial exposure and is at risk to lose the case. If a lawyer agrees to defend the client in the lawsuit with a reverse contingent fee agreement, the client agrees to pay a contingent fee that is an agreed-upon percentage of the difference between the client’s predetermined financial exposure and the final amount of any judgment or settlement that the client pays. For example, if the client’s pre-determined financial exposure is $10 million, and, after litigation, the lawyer negotiates a settlement for $4 million, the client would pay a percentage of the $6 million savings as the reverse contingent fee. On the other hand, if the lawyers proceeds to trial and loses $10 million, then the client would pay nothing. Reverse contingent fee agreements also can be used as part of a hybrid fee agreement, where the client:
Reverse contingent fee agreements allow companies to budget and manage risk. Reverse contingent fee agreements only work if the client has the financial resources to reserve and pay the reverse contingent fee.
There are various types of hybrid fee agreements. A simple version is a blended hourly rate agreement where all of the attorneys and paralegals bill their time at the same hourly rate. A fee collar agreement is an agreement where the attorneys and paralegals bill their normal hourly rates, but the client and the law firm agree to a minimum and maximum fee for the matter. A fixed fee plus hourly agreement is one in which the law firm charges a fixed fee for certain tasks or projects in the scope of work, and charges by the hour for other tasks.
An hourly rate plus contingent fee agreement is a fee agreement in which the law firms agrees to accept a lower hourly rate than normally charged, but also takes a percentage of any recovery as a contingent fee if successful.
A do-not-exceed fee agreement is a variation of the “fee collar” hybrid agreement. In a do-not-exceed agreement, the law firm agrees to cap legal fees at a specific amount. Such an agreement usually works best for discrete projects, such as when the client wants an early investigation and analysis of a legal claim before proceeding with a lawsuit. The firm bills by the hour for its services; however, it agrees that the charges will not exceed the pre-determined cap without the client’s written permission. If the charges approach the pre-set cap, the firm notifies the client and stops further work (although it may voluntarily complete the project without extra charge if it is close to completion).
Clients often choose do-not-exceed fee agreements when they engage a lawyer to analyze potential legal malpractice claims or particularly byzantine commercial transactions. A client’s early and limited investment in analyzing a claim allows the client to make an informed decision about whether to proceed with a lawsuit.
Clients benefit from do-not-exceed fee agreements because the agreement brings predictable cost to a limited engagement. Moreover, if a lawyer can complete the analysis and provide the client with the legal advice for less than the agreed-upon cap, the client saves the difference. The risk to the client is that, in some circumstances, the lawyer may not be able to finish the project within the cap. However, the client can then make an informed decision about whether to proceed with the project.
If a law firms is required to engage outside consultants or expert witnesses to complete an analysis, those consultant expenses are typically outside the negotiated do-not-exceed cap.
A fixed fee agreement is an agreement where the client pays a fixed fee for the legal representation, regardless of the time the attorneys and staff put into the case. Fixed fee agreements are often used in criminal defense representations, but can also be used in many different types of litigation, such as a simple breach of contract case or foreclosure proceeding. The client often is required to pay litigation costs in addition to the fixed fee.
A flat fee agreement is an agreement where the client pays a monthly flat fee for the legal representation regardless of the time the law firm puts into the case during the month. Flat fee agreements can work well in a major case in which a team of attorneys and paralegals will be spending substantial time on the case each month or where there are a series of similar major cases.
Flat fee agreements can be combined with other hybrid fee agreements, such as contingent fee agreements or reverse contingent fee agreements. Again, the client usually is required to pay litigation costs in addition to the flat fee.
A retainer is a generic term that can mean several things: a fee paid up front to the law firm to engage the firm; a periodic payment to the law firm so that the law firm will be available to consult with the client; or, as is most commonly used in litigation, a deposit for legal fees and legal expenses to be charged in the future.
Most law firms, including Ogborn Mihm, require most clients to provide retainer deposits because they have cash flow requirements like any business. Law firms want to ensure that it can pay overhead, and retainers help manage cash flow and budget. If the retainer serves as a deposit, the law firm places the retainer in a client trust account. It then charges fees and costs advanced to the client’s retainer each month. At the end of the engagement, if the fees and litigation costs are paid in full, the law firm returns any remaining funds to the client.
An evergreen retainer is a type of deposit in which the client is required to replenish the deposit to a pre-set amount each month as fees and expenses are charged against the deposit.
A retainer is usually not a fixed fee. Just because the client pays a retainer up front does not mean that client will not owe legal fees and costs beyond the amount of the retainer. Such would be a fixed fee agreement; in litigation matters, most retainers merely serve as a deposit held in the law firm’s client trust account for legal fees and expenses to be incurred in the future. Therefore, before signing a fee agreement with any law firm, carefully read the agreement and make sure that you clearly understand how the term “retainer” is being used.
Litigation costs are the expenses incurred in a lawsuit other than attorney fees. Such expenses commonly include court filing fees, court reporter fees, expert witness fees, photocopy or digital scanning expenses, and a host of other items. In certain cases, litigation costs may include forensic accounting, engineers to perform accident reconstruction, or destructive testing of products, such as in automobile products liability cases.
While we are eager to accept alternative fee arrangements, we also want our clients to have some “skin in the game” with respect to the litigation costs. Thus, we ask that our clients pay litigation costs if the client has that ability to do so. Indeed, if the potential client has the ability to pay litigation costs, but refuses to do so, we will usually decline the case regardless of the merits. Our thinking is that we and our clients are effectively “partners” for purposes of the lawsuit. If we are going to undertake the risk and investment of our time and money to pursue the client’s claims, we want the client to be fully committed to the endeavor, both by committing the client’s time and the client’s financial resources if the client has the resources.
Unless a law firm has agreed to advance litigation costs on behalf of a client, it will generally pass on invoices to a client for direct payment. For example, if the firm receives an invoice from an expert witness, or a court reporter, it will generally forward the invoice to the client for direct payment. For smaller advances or when necessary for other practical reasons, a law firm may advance the cost on behalf of the client and then invoice the client for the cost advanced.
If the client does not have the ability to contribute to litigation costs, and the law firm agrees to take the cases, it may agree to advance the client’s litigation costs. However, the firm will usually require the client to repay those costs advanced when he or she recovers a settlement or judgment. A law firm may slightly increase the contingent fee percentage to account for the increased risk of advancing costs to a client.
Unless the lawyer specifically agrees otherwise in the engagement letter, a client will be obligated to repay litigation costs advanced on the client’s behalf even if the client loses the case.
Litigation is war! When is the last time that a war was concluded on time and under budget? While lawyers can reliably predict budgets for some routine litigation, for example, simple breach of contract cases or some personal injury lawsuits, other types of litigation can easily deviate from the most carefully prepared budgets. Complicated business, legal malpractice, and bet-the-company litigation can take unforeseen twists and turns that eviscerate budgets, almost always for the worse.
Ogborn Mihm often prepares litigation budgets for a client; we think that preparing a budget is often helpful for case planning. For complicated cases, budgets are often not simple projects and may take days to complete. Moreover, because our client will have an opponent who is plotting to thwart our client’s litigation goals, and may be actively attempting to do our client harm, litigation budgets must be continually monitored, revised, and updated to reflect the current state of the lawsuit. For these reasons, all clients have to understand that litigation budgets are estimates, not guarantees.
Remember, “Every battle plan is good until the first shot is fired.” So it is true with litigation budgets.
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