Billable Hours, Boutique Law Firms, Small Law Firms

Skin in the Game: Mixed Hourly and Contingent Fee Billing

Keeping your client invested in the litigation makes for a better relationship.

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By the time I graduated from law school in 1999, I had become rather risk-averse. For example, several of my friends were excited to enter the dot.com world with hopes of becoming uber-wealthy. I eschewed those prospects for the security of a more regular, albeit more modest, Biglaw paycheck. Eighty thousand per year struck me then (and now) as a generous starting salary.

Of course, forming and managing a new law firm is a risky business proposition. But to the extent that I now am fully responsible for generating my own work, I feel like I actually have greater job security than I did when I was beholden to working for other rainmakers on their cases. So even though starting a firm was risky, it didn’t really portend a fundamental shift in my natural inclination to prefer security over risks even if that means foregoing potentially bigger gains.

My natural hesitancy to take unnecessary risks helps explain why I am disinclined to take on pure contingent fee cases. Certainly, contingent fee cases have a lot more potential upside (i.e., they offer the possibility of making substantially more money) than do hourly billing cases. Of course, this potential upside is counter-balanced by the risk of total loss; i.e., the risk that the attorney will recover nothing.

Since it costs a lot to win and even more to lose, you have to be very careful before making an investment of your time, energy and other resources into a contingency case. I’ve written before about some factors you might analyze when considering whether to handle such a matter.

Conversely, because hourly attorneys get paid regardless whether they win or lose, they trade the potential for a big upside in exchange for eliminating the risk of total loss.

Personally, since my firm launched in 2009, I have always preferred straight hourly billing to purely contingent fee arrangements. Fortunately, I’ve had the luxury of acting on this preference because I have always had more than enough billable work to keep the lawyers in my firm fully utilized.

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But when billable work is slow, contingent fee cases take on added attractiveness. This is one reason why many attorneys who start private practices naturally find themselves drawn to contingent fee work. Even if they might naturally prefer to be paid by the hour, they reason that contingent fee work is better than no work at all.

To some extent, that might be true. On the other hand, attorneys starting new solo or boutique firms would do well to remember that losing the time to engage in business development is the hidden opportunity cost to doing administrative tasks or any other work that is not within the business plan. If I were to find myself with extra time on my hands, I would be inclined to spend that time trying to drum up new hourly-billing engagements rather than spend my time on a purely contingent matter.

Business generation is very different for a contingent fee attorney than it is for an hourly biller. For a contingent fee attorney, business development means trying to weed out those matters which would not be a good investment. A virtually infinite number of clients are willing to hire an attorney if they need to pay only if they prevail in the litigation.

While I spend a substantial amount of time preparing pitches for hourly-billing engagements, I also have had many potential clients try to convince me why I should handle their case on a contingent fee basis. For those matters, it is the prospective client who is putting together the pitch materials explaining why their matter is meritorious.

In these situations, I have found it helpful to explain my firm’s business model and why handling a contingent fee matter means that I will be suffering an opportunity cost of lost hourly-billing. Some clients assume that all lawyers are dedicated to correcting injustice regardless of the economics involved. I try to explain that urging me to handle a matter on a contingent fee basis is essentially asking me to make a business decision involving a substantial investment of my time, energy and other resources.

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By engaging in this conversation with multiple prospects I have developed an affinity for handling cases on a mixed hourly and contingent fee basis. Essentially, I offer to handle a matter with greatly reduced hourly rates coupled with a lower-than-standard success-based contingent fee.

Offering this arrangement to prospects makes it easier for me to short-circuit an extended discussion as to the client’s view of the potential merits of their case. I simply remind the client that they are asking me to make a substantial investment into their matter and that they should be willing to invest in it at least to the same extent. I ask directly, “Why should I invest in something into which you yourself are not willing to invest?”

Requiring a client to have some “skin in the game” is helpful even if the majority of your compensation will be a success-based contingent fee. I’ve had some excellent results with these arrangements. For the cases that have not resolved favorably, my firm did not suffer devastating economic consequences because we still made an hourly rate which enabled us to cover salaries and other overhead. For cases that resolved favorably, we earned much more than had we handled the matter on a strictly hourly basis.

Also, clients proceeding with a mixed hourly / contingent fee engagement are less likely to take an unreasonable settlement position. I remember one matter my firm was handling shortly after we began our practice. Because of certain nuances requiring expert testimony, pursuing the matter through trial was likely to cost at least as much or more than the likely recovery. We had an opportunity to settle the case, but the client told us that “money was no object” in obtaining justice. I still laugh at that comment. Of course money is no object when it’s not your money at issue.

If you have recently opened or are thinking of opening your own small law firm, you will always be tempted to turn to straight contingent fee cases when you start, or when business is slow. But you should also consider a mixed hourly / contingent fee approach. There are a number of good reasons for asking even contingent fee clients to have a little bit of skin in the game.

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