QUESTION

Are contingency fees appropriate for plaintiffs in business litigation?

SHORT ANSWER
A thorough evaluation by the law firm and detailed discussion with its client will help decide if a contingency arrangement is appropriate.
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In a contingency fee arrangement, the law firm receives a percentage of any monetary recovery. If it’s a “pure” contingency, the law firm is paid nothing unless there is a monetary recovery. In a “partial” contingency arrangement, the law firm may be paid a fee (such as a portion of their hourly rate, or a fixed monthly fee), plus a percentage of any recovery. The percentage that the firm receives varies depending on the agreement. Whether the client pays out of pocket expenses also depends upon the specific agreement between it and the law firm.

The primary advantage (to the client) of a contingency fee arrangement is that it limits the cash outlay while the case is being litigated. And of course, if the client loses the case, or if there is no monetary recovery, the client can walk away paying much less than it would have on an hourly basis, or even nothing at all. Contingency agreements also help align the client’s interests with those of the law firm (since a settlement or judgment puts money on both of their bank accounts).

Contingency agreements are not, however, always appropriate in business disputes. In many commercial lawsuits, the defendant will file a counterclaim. The client and law firm then need to determine whether the contingency covers fees for defending the counterclaim, or if the client needs to pay an additional fee. Further, if the client becomes more concerned with defending the counterclaim than recovering money on its initial complaint, then the entire premise of the contingency may need to be re-examined.

Further, a client’s objectives in business litigation may go beyond money. For example, the client may want to minimize disruption to its customers and employees, or to force the defendant to stop engaging in inappropriate conduct. The law firm that has the case on contingency, on the other hand, will be incentivized to do whatever is necessary to maximize the monetary recovery.

Finally, contingency agreements need to make financial sense for both the client and the law firm. On a large claim, the amount paid to the lawyer on a contingency might far exceed what the law firm would have been paid hourly (to compensate the firm for the risk it has taken). On small claims, an inadequate contingency might leave the law firm essentially doing the work with little upside.

The best approach on contingencies is to for the law firm to undertake a thorough evaluation before accepting the case. The law firm and client should talk about possible outcomes, and calculate potential payments based on a range of possible recoveries. They should specifically discuss the possibility of counterclaims and how they will be handled. Above all, the client should be wary of contingency proposals that seem too good to be true. It will want to make sure its law firm has a plan for seeing the case through even if things do not go as planned.