Many attorneys who leave Biglaw for smaller or solo practices find themselves considering contingent fee cases, either by necessity or design. “By necessity,” because a practice may not have many paying clients when it first forms. “By design,” because an attorney working for a contingent fee has the prospect of hitting a huge payday and making many times what an attorney who bills by the hour can make.
The challenge of business development takes on a whole new meaning when applied to contingent fee lawyers. To some extent, a contingent fee attorney has the opposite problem of an attorney billing by the hour. There is no shortage of clients who want a lawyer they need pay only if they win. Thus, the contingent fee attorney always has too many potential clients whereas the hourly attorney always has too few.
Because attorneys can find themselves inundated with clients offering a contingent fee, evaluating which cases to take, and which to turn down, can be challenging. Essentially, taking a case on contingency is an investment of your time, energy, and financial resources. You need to carefully assess whether the investment is a good one….
An obvious factor to consider is the magnitude of damages or the amount at stake. When an attorney hears a potential client say that he has been damaged to the tune of $1 million, the attorney sometimes can’t help but imagine what a check for $333,000 or more would do for his bank account. A potential client who burns herself with coffee suddenly becomes more interesting if you learn that she is a 79-year-old woman who suffered third degree burns at the hands of an indifferent corporation.
The next factor, also obvious, is the likelihood of success. All attorneys instinctively assess their prospects of winning any particular dispute. When presented with a potential lawsuit, it is natural to consider how likely you would be to win.
I have heard a number of attorneys describe a potential contingent fee case in simple terms based solely on their perception of how “good” the case is, by which they mean, how strong the merits are. For example, an attorney might say, “This is a great case. Liability is a lock.”
This simplistic view is misleading. A good contingent fee case is one which presents a strong business proposition for the lawyer considering it. The likelihood of success is only one factor to consider.
Attorneys sometimes forget that success is rarely a binary choice between winning and losing. A more nuanced view would consider a range of possible outcomes, each with its own likelihood of success. For example, suppose you are considering a case in which you believe you have a 70% chance of recovering up to a million dollars. It’s easy to lose focus and end up with a poor business decision. One way to assess outcomes might look like this:
Multiplying the potential outcomes by the likelihoods gives you an assessment of what the case is really worth. Using the above example, the million dollar case in which you have a 70% chance of prevailing is still worth only $390,000: ($200k x 10%) + ($400k x 30%) + ($750k x 20%) + ($1M x 10%).
Of course, whatever numbers you plug in are necessarily speculative, and I’m sure other lawyers have their own ways of valuing cases. But at least this approach forces you to consider a range of possible outcomes and likelihoods.
Once you come up with your best assessment of what a case is really worth, you need to consider how many hours you might need to spend to get to those outcomes. Again, the hours likely to be expended may vary considerably according to different potential outcomes, so you need to consider another matrix that matches hours expended with likelihood. For example, you should consider the possibility of gaining an early settlement, a settlement following a pretrial mediation, a recovery following trial, etc., each with their corresponding likelihood.
Obviously, if you are contemplating paying costs up front, you also need to carefully assess those and factor them in. Expert witnesses can make contingent fee cases prohibitively expensive to prosecute. In patent cases, for example, expert fees and other expenses could be 30% or more of the total fees. Some cases might require extensive travel for depositions and the like; again, that can be expensive.
Once you’ve done all the prognosticating and number crunching, you can finally arrive at an expected hourly rate. That number already inherently factors in the risk of loss; nonetheless, if you are risk averse, you might still require that rate to be some multiple of your standard hourly rate. The luxury of choice, coupled with our inherent risk-aversion, is one reason my firm has handled only a small number of contingent fee cases, albeit with great results.
Considering the effort involved also is important because you need to know not just how much work will be required, but when you might be getting paid. A complex class action can take years before it resolves, even if it ultimately settles. I presume a dog bite case might take considerably less time. Any business needs to know when it can expect payment vis-à-vis its expenses. Even if your expected hourly rate is attractive, you might be unwilling or unable to devote the resources necessary to obtain the payoff.
You also should think about a number of potential soft costs. For example, an unpleasant client may increase the risk of a bad outcome. But even after factoring that, you also need to consider that working with that client might make your work a whole lot less fun. Working with bad facts, or a client with unreasonable expectations, also affects more than just your economic analysis; it might also determine how enjoyable the engagement is.
Lawyers who recently have started solo or small firm practices sometimes assume that even a poor contingent fee case is better than no case at all. But since it can cost a lot to win, and even more to lose, you should spend some time just wondering what cases to choose.
As I have written before, attorneys running a solo or small firm practice should never forget the potential value of non-billable work. An attorney never faces a choice between taking on a bad case or doing nothing because he or she can always choose, instead, to engage in marketing or other business development efforts. Viewed that way, a contingent fee arrangement that does not offer a strong business proposition rarely is a wise investment.
Tom Wallerstein lives in San Francisco and is a partner with Colt Wallerstein LLP, a Silicon Valley litigation boutique. The firm’s practice focuses on high tech trade secret, employment, and general complex-commercial litigation. He can be reached at [email protected].