Boutique Law Firms, Litigators, Small Law Firms

Beyond Biglaw: What's A Case Worth?

It's critical for law firms, especially small law firms, to evaluate at the outset the potential value of a case.

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money-question-mark-value-valuation-300x169One of the greatest benefits for a boutique law firm that is established in the marketplace is the ability to choose which cases to take on. It may take years to get to the point where having that ability is feasible, but when those days arrive, it can be a blessing. At the same time, many blessings also bear a tinge of a curse, and no decision is as fraught for a small law firm partner as the decision whether to take on a new matter — particularly if that matter will require the law firm to assume financial risk of its own. Accordingly, the importance of intake procedures cannot be overstated, especially for a smaller firm with limited bandwidth and a higher risk of incurring debilitating opportunity costs by making the wrong decision.

There is a whole column that can be written on the various aspects of proper intake procedure for boutique law firms. From the use of engagement letters, to conflict checks, to vetting new clients by asking for references, smart firms do whatever they can to mitigate their downside risk of getting stuck with a bad case or client. For purposes of this column, however, I want to focus on a more speculative aspect of the intake process, that of trying to place a value on a particular engagement. Firms must get this exercise right more often than they get it wrong, particularly if they want to avoid ruinous engagements that drain more of the firm’s resources than they are worth. This is true regardless of the billing arrangement the firm employs for that matter, be it hourly, flat fee, or contingency.

The latter two fee structures, however, perhaps provide an additional measure of risk for the firm, and greater care must be given when the client is unable to shoulder the full expense of the case. When the firm shares in the risk of not getting a good result, the time to evaluate the odds of success starts at the first conversation with the client. And it goes without saying that the firm should never send out an engagement letter without some evaluation beforehand of the likelihood of success of the representation.

There are many ways to handle such an evaluation, but in order for the firm to have a prayer of getting it right, it must determine as best as it can just what the engagement is potentially worth. There is no point in taking on a case where the client agrees to a generous contingency percentage if the likelihood of ever seeing a dollar from the engagement is nil. Likewise, if the case is solid with a good chance of success, relaxing the firm’s normal contingency rates may make sense. As a lawyer gains more experience, one would hope that their judgment would improve in this area. But it is always a challenge.

There are several key steps to consider taking as part of this all-important analysis. Perhaps the biggest red flag to watch for is a client that doesn’t know what they want from a case. Yes, clients may not understand what is feasible from a damages or settlement perspective, and may need counseling in that regard, but there are some potential clients who don’t seem interested in any reasoned discussion of what the case objectives should be. Let another lawyer make the mistake of representing anyone falling into that category. Likewise, when a potential client is resistant to a more sober evaluation of the merits of their demands, lawyers must be careful about proceeding further with the engagement. Care is necessary, because some clients will pretend to agree with the law firm’s view of the expected recovery of the case in order to get the law firm to commit to the engagement. But once they have the firm on the hook, the outlandish demands that the law firm supposedly talked them out of making reappear — likely sabotaging any chance for success in the process.

At the same time, law firms must also know what they expect from an engagement. Is the firm looking for a lottery ticket engagement that they can afford to whiff completely on? Or are they looking to build the client relationship in the hopes of generating some recurring revenue, albeit at a more modest level? The ebbs and flows of the fiscal year, and the firm’s finances, will help determine what makes sense for the firm at any given time. The trick is to remain disciplined and not allow the (warranted, considering how difficult it can be to secure a new potential client) excitement of a new case to override a sober analysis of the potential financial impact of the engagement.

One more thing. Any analysis that does not take into account the wherewithal of the potential “customer” (i.e., defendant) for the client’s demands is inherently flawed. Wherewithal is not just about financial condition, or ability to pay, either. Other factors, such as timing since the target was last sued, pressing needs to avoid bad publicity, or general industry climate can also be important. Ultimately, determining what a case is worth will be a very fact-specific inquiry, and often requires making a decision based on imperfect information — which makes the process at once fun and frustrating, but also underscores just how important getting these decisions right more often than not is for small firms. Or at least for those firms whose partners work in the hopes of increasing their own net worth.

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Please feel free to send comments or questions to me at gkroub@kskiplaw.com or via Twitter: @gkroub. Any topic suggestions or thoughts are most welcome.

Gaston Kroub lives in Brooklyn and is a founding partner of Kroub, Silbersher & Kolmykov PLLC, an intellectual property litigation boutique. The firm’s practice focuses on intellectual property litigation and related counseling, with a strong focus on patent matters. You can reach him at gkroub@kskiplaw.com or follow him on Twitter: @gkroub.

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