Contingency or success fees

By Tucker H. Byrd
Co-Founder of Byrd Campbell, P.A

Building and Protecting Businesses: Byrd Campbell Means Business!

Everyone has heard the joke about the middle-aged lawyer who had passed away and protested to St. Peter in Heaven, “It couldn’t have been my time to die. I was too young!” St. Peter responded, “What do you mean too young? According to your timesheets, you’re 110!” Long the brunt of jokes about billing practices, lawyers have been under constant attack about the seemingly ever-controversial “billable hour.” Clients want something beyond the billable hour; they want something which directly aligns their interests with those of their lawyer. They long for contingency or “success” fee arrangements, but are lawyers ready, willing, and able to deliver?

I’ll be the first to state that by a wide margin most lawyers are entirely ethical in the way they charge and bill. Guided by clearly understood prohibitions against “excessive legal fees,” and possessing a general sense of decency, fairness, and justice, most lawyers do it the right way. Yet, a pall hangs over the practice of hourly billing. The reasons why, and what lawyers should be about it, are often the topic of law firm management committee discussions struggling to find the answers, as the practice of law intersects with the real world of business, often in a very incongruent way.

The reasons for the negativity could be many. First, in theory every competent lawyer, performing a specific service, in a specific legal market, should complete the service in the same amount of time at the same rate; however, in reality, no lawyers and how they handle a matter are the same. There are too many variables to be considered. Second, the outcome of a matter, and its resulting cost, can rarely be predicted because the objectives of the adverse parties may totally conflict. Whether in a lawsuit or a business transaction, one side may want to push, while the other wants to delay. Finally, legal matters often devolve into an “action-reaction” cycle where parties simply react to one another. One side pushes, so the other pushes back harder, all the while racking up billable hours—and legal fees—with neither side focusing on the mutual objective of resolving the matter, either through negotiation or litigation, as quickly and cost-effectively as possible. For that matter, sometimes one side simply wants to “outspend” the other.

It’s no wonder that hiring a lawyer by the hour may be the only service you can buy where you have no control over the amount of time spent. Try to think of one. Bet you can’t. Sure, you can have the lawyer prepare a budget, but the outcome and its resulting legal fees rarely adhere to, follow, or even respect, it.

“Billable hour” engagements will always have a place in the legal profession. But the so-called “alternative fee” arrangements, which appeal to clients looking for lawyers to have “skin in the game” offer law firms a chance to secure clients looking for the lawyer who will embrace the problem in a tangible way by sharing the risk. Businesses which preach their executives to “take ownership” of a problem understand and accept contingency or “success fee” lawyers willing to join them in that exercise.

Few law firms follow sound strategies to develop contingency or “success” fee practice. Law firms rooted in a billable hourly practice dependent upon steady cash flow to operate often cannot afford it. Senior lawyers, accustomed to being adjudged on timekeeper revenue, have a hard time trusting that their firm will take care of them while they pursue a contingency fee. And when law firms attempt to “walk on the wild side” and take on a contingency matter, they often try to find the perfect matter, one so certain, with such a definite upside as to be riskless—the proverbial “sure thing.” The irony, of course, is that if the matter is a sure thing, then the lawyer does the client a disservice by suggesting a contingency fee, as the enhanced payout on a successful contingency should exceed the hourly rate.

Having handled hundreds of contingency fee commercial matters, I have come to several conclusions about contingency fee work:

  1. Lawyers who only dabble in contingency fee work, usually dawdle on those matters. Consumed with the hourly matters—which keep the lights turned on—lawyers who infrequently take on contingency fee matters may relegate to matters to their spare (i.e., rare) time. When your adversary knows that you only work on the matter in the off hours, those “rainy days,” see how quickly they take advantage of the lawyer’s lack of daily attention to the matter.
  2. The best way to minimize the risk of contingency fee work is to have a substantial enough caseload to spread the risk over a number of matters. Too much uncertainty exists to completely handicap the risk being undertaken in a specific matter. Picking only “winners” is a vain exercise. There will be losses, so the key to developing a successful contingency fee practice lies in finding the optimal mix of the volume of matters to be competently handled by the firm’s available resources, while producing a total return compensating for the risk and investment of time. Choose too many contingency matters, and the work cannot be done. Choose few, and the risk is too concentrated. A contingency fee caseload, when properly balanced, can be likened to a portfolio-type risk model, where the productivity of the overall caseload defines success, not one loss or win.
  3. Firms which do not protect lawyers working on contingency fees matters pose impenetrable barriers to developing a successful contingency fee practice. Hitting lawyers in the pocketbook for taking on a contingency fee matter quickly chills anyone’s interest in taking on the risk. Before hiring a lawyer to handle a contingency fee matter, clients should explore what the impact will be on the lawyer, personally, if the matter is unsuccessful. I’ve heard tale of law firms instructing lawyers to diversity their case mix by taking 10% of their matters on a contingency fee bases. This is akin to playing roulette with one chip, trying to pick that one winner. The odds are overwhelmingly against you. Better to take on a number of cases, an entire handful of chips, spread across the board to maximize the return.
  4. Due care should be taken to understand the risks and rewards of a contingency fee matter. Lawyers should not treat their contingency fee as the speculative part of their portfolio. A properly composed contingency fee caseload should include a sufficient number of reasonably risky matters, and not a select number of wildly-speculative matters. Look at the anticipated outcome and the amount of time needed to achieve that outcome, and try to select cases likely to return between 3-10X on what would have been the hourly rate.
  5. Lawyers inclined to take on contingency fee matters will understand that business people get and appreciate the arrangement. Most business people understand that results matter, not just effort. They also accept the notion that by taking on the risk, the lawyer should make more than an hourly wage for the work. Moreover, offering contingency fees is a powerful tool when vying for business against other hourly billing firms.
  6. Lawyers who handle contingency fee matters are freed lawyers, not free lawyers. Just because lawyers do not bill by the hour, that hour remains valuable. Clients need to understand that your time must be wisely spent. You’re not a free lawyer, just a freed (from the billable yoke) lawyer. The aphorism, “A lawyer’s time is his stock in trade” still rings true, even for contingency fee lawyers.
  7. Finally, let’s face it, many people think there’s something sexy about a lawyer who will put their money where their mouth is and swing for the fences with the client on a contingency fee. If the lawyer possesses neither the financial ability nor risk tolerance to take on contingency fee matters, there are alternatives. Co-counsel with a contingency fee firm, or enter into one of several hybrid fee arrangements.

So there you have it. This is why we at Byrd Campbell handle contingency fee litigation and transaction matters. We do not see them as “alternative fee” matters. They are our norm. We often co-counsel with lawyers whose clients desire a contingency fee arrangement, but are unable or unwilling to take on all the financial risk. Billing by hour, which we do when warranted, will always have a place in the legal profession. Billing by the “success”—when done right—is much more rewarding, professionally, financially, and personally, for client and lawyer alike.