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The image most often associated with contingent fee cases is the late-night television commercial featuring a lawyer who proclaims to clients, “We don’t get paid unless you collect.” What the advertisements typically do not include is how much the lawyer keeps if he or she is successful. Though contingent fee arrangements have been a source of great debate among the organized bar, the truth is that they are here to stay in one form or another. In the past they have been most often used in general plaintiff work, personal injury, medical malpractice, Social Security collection, and other forms of civil tort litigation. In increasing measure, however, contingent fee arrangements of growing variety are finding their way into corporate America, both in transactional work and in litigation. In law firms most contingency cases are first vetted by the originating attorney with the firm’s finance committee to weigh their potential risk and potential value. Will a case drag on for years? If so, will the payoff be enough to offset the time invested? After a case is deemed worthy, law firms then create “investment budgets” for contingent fee cases based on a sliding scale that establishes a correlation between a potential financial outcome and its probability. In short, the more probable the favorable outcome, the more a firm is likely to budget. The originating lawyer or lawyers then generally negotiate a draw based on a percentage of the revenue generated by the case; additional draws of lesser percentages are allocated to specific attorneys who join the project team. The balance — what’s left in the budget — is then allocated to the pool from which all partners secure a draw and distributed according to the firm’s overall procedures governing partner distributions. Despite what appears to be a fairly complicated process, both clients and lawyers are becoming more accepting of alternative billing arrangements. Clients generally view alternative billing practices as a way to predict and control costs while giving lawyers incentives to take more risks, as well. Increasingly, corporate law departments want their outside counsel to share more of the financial risk and are thus willing to allocate higher returns at the conclusion of a matter for a lower fee structure while the case is pending. According to a recent survey conducted by the law firm Fulbright & Jaworski, in-house legal departments say their top concern is reducing the money they spend on legal costs. Lawyers, meanwhile, are creating greater margin growth by diversifying their methodologies for revenue creation. ALTERNATIVE BILLING Though the billable hour is not vanishing anytime soon, at least two developments have contributed substantially to the growth of alternative billing. First, corporate clients are seeking ways to cut legal costs and have been pushing back on the status quo by insisting on alternative billing arrangements. And given the competitive landscape for lawyers, there is substantial acquiescence among law firms to these nascent client demands. Second, the technology sector has created substantial value in assets such as patents and other intellectual property that have not been deployed or have very limited commercial distribution. When holders of these assets seek legal counsel for patent infringement cases or other legal wrongs, they typically do not have the financial resources to retain the legal talent required. In exchange for the potential of substantial revenues well exceeding the normal hourly rate, law firms make investments in this category of cases. There are many names and styles of contingent fee arrangements: benchmarked success fees, blended fees, incentive-based fee structuring, results billing, and enhanced flat-fee arrangements. The corporate world tends to call them, more simply, alternative billing. The appropriate alternative billing arrangement is often affected by a wide array of factors, including the type of case, how long it’s expected to take, the desired results, and the personalities of the lawyer and the client. Given the complexity of these issues, it is quite difficult to establish hard and fast rules about what approach ought to be pursued in a given case. Here is an overview of several approaches that are increasingly common. HOW WILL YOU BE PAYING? • Blended hourly fee structure In a blended hourly fee structure the client agrees to a combination of an hourly rate and a negotiated contingency. Typically, the pure contingent fee portion runs through dispositive motions and discovery, and then converts to an hourly rate if the case does not settle before a certain date before the trial. The appeal of this model to many clients is that it gives lawyers and law firms the incentive to reach a resolution more quickly, thus saving the company time and resources as well as protecting the client from potential fallout from protracted litigation. The value for the lawyer is that meaningful profits can be generated early in the process. Margins are not dependent on drawing out the process and accumulating thousands of billable hours, which is the unstated assumption underlying revenue growth in the pure hourly model. • Success-fee formula In this arrangement a flat project fee is negotiated and then combined with a success fee based on parameters upon which the lawyer and client agree, such as a settlement above or below a certain amount or a transaction above or below a certain amount. This approach is very common in long-term relationships between lawyer and client, particularly when the law firm provides a good portion of the client’s legal needs. Substantial cost containment and predictability are the value of this model for clients. Many law firms like this model because they can adapt their cost structure to these engagements, including hours, personnel, and fixed costs, in a way that allows them to generate acceptable profit on the fixed-fee portion and substantial margin growth if the success fee is paid. This model, therefore, seems to work economically both for lawyer and client. • Pure contingency The pure contingency model is an arrangement that is increasingly acceptable to law firms. Corporations have long been open to it. The BlackBerry case portrayed quite vividly the gamut of issues that can arise in pure contingency cases in corporate litigation. The plaintiff, NTP, sued Research in Motion (“BlackBerry”) for patent infringement and sought to enjoin BlackBerry from using its patent unlawfully. Though NTP did not have an earning asset, it did own a number of patents that proved to be very valuable. Before agreeing to the contingent fee arrangement, NTP’s counsel likely conducted substantial due diligence on the quality of the case, the validity of the patents, and the investment of time it would need to make. In the end, given the more than $200 million payday, the gamble was worth it. Clearly, law firms’ executive committees, finance committees, and other internal groups associated with business planning have formulas and metrics that allow them to evaluate the risk represented by a given contingency fee case. Most of them include the following tools for evaluation: substantial research, return-on-investment index, success in comparable cases, the costs for allocating resources, and an analysis of the time involved. Obviously, the amount of time and effort a law firm is willing to invest in a pure contingency case is connected to what it estimates is the probability of success in that case. Most of the time, a pure contingency arrangement assumes that there is a great likelihood that the parties will settle, and thus law firms gamble that the very costly activities associated with lengthy discovery will not be in play. • Results billing Results billing is a less-common strategy but one that can allow an attorney to manage a client’s expectations in a case that might be more emotionally charged. In this model no portion of the fee is connected to risk. Rather, the client and the attorney negotiate a fee based on a gradation of different possible outcomes. Unlike contingent fee cases, results billing — sometimes known as “value billing” — assumes that results are often not uniform. One of the best matrimonial attorneys in the country once said: “Clients should pay for value and quality, not time. That’s why the practice of law is a profession, not a trade.” Results billing requires an open and honest conversation between lawyer and client in which they agree on the objectives and the results of the engagement. Typically, the fees are then plotted on a “grid.” Frequently, the grid includes tangible targets, such as asset preservation, duration of the process, tax savings, penalties avoided, and other results that can vary. This model is most common among small specialty firms that handle matrimonial law and intellectual property, as well as litigation boutiques. DANGER AREAS While alternative billing arrangements certainly create a greater degree of shared destiny between lawyer and client, they are not without ethical danger areas. The more closely the lawyer is financially aligned with the client’s legal matter, the more room there is to have conflicting views on settlement terms or on the value of a transaction. Early in the process the lawyer is more inclined to settle or sell because it represents a greater profit opportunity while the firm has less invested. On the other hand, what might be very satisfying terms for a client who has been involved in a protracted case or transaction might be very unappealing to a law firm that has invested considerable resources in the engagement and has reason to believe that it can generate a higher settlement number or purchase price by holding out for better terms. Though simply stated, the conflict in this scenario is very real, as the ethical rules give the client control over the objectives of the attorney-client relationship and the law firm decision-making authority over the means to achieve those objectives. If the client’s initial goal is the best possible results for the money under any circumstances, the law firm has every legal basis to hold out for higher dollars. On the other hand, if the client establishes parameters that include time, corporate impact, or any other consideration that combines financial considerations with other business interests, the law firm will likely lose the benefit of its contemplated bargain. Alternative billing certainly offers a more dynamic approach for structuring the financial relationship between lawyer and client. But like all good partnerships, the terms of the relationship should be constructed while everyone still likes each other.
Harlan Loeb is the director of the litigation practice at Financial Dynamics and an adjunct professor of law at Northwestern University Law School.

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