Contingency Fees: What Does "We Don't Get Paid Unless You Recover" Really Mean?
A “contingency fee” agreement is one of the most common fee arrangements lawyers offer. It’s an agreement that might make sense where a client stands to win a substantial recovery but cannot afford to pay a lawyer. A law firm may agree to take the case on “contingency” — the firm will not charge the client any fees unless the client either wins at trial or gets paid in a settlement. The law firm may even claim “we don’t get paid unless you recover.”
But what does that really mean? Have you simply lucked out and found a group of lawyers who don’t mind getting paid nothing because they believe so strongly in their clients’ cause? Why, then, did they require the payment of a “retainer” of $1,000 or more?
Contingency agreements are in fact not all the same. It may be that the lawyers’ “fees” are only payable if there’s a recovery, but the client could still be responsible for “costs.” Costs can include photocopying charges that are much higher than the cost of paper and ink, on-line research services for which the firm includes a similar surcharge, and even the “expense” of hiring additional attorneys on a contract basis. As a result, though the lawyers may not be getting paid “fees” unless they win, the firm may be profiting from the client’s matter, out of the client’s up-front “costs,” regardless of the outcome.
Granted, when lawyers claim that their contingency arrangements involve no up-front fees, they are supposed to make clear whether the client is still responsible for costs and what those costs include. Failing to do so is a violation of lawyers’ ethics rules and can result in the agreement being invalidated as well as disbarment. In fact, lawyer advertising is also supposed to make the distinction clear and violates ethics rules if it fails to do so.
So how can all those lawyers who say you pay nothing unless you recover keep saying that? It is possible that a particular contingency fee agreement provides that the lawyer will not only forego fees but advance costs until there is a recovery — but even then there may be a catch.
For example, it is not illegal for a lawyer to insist that, if there is a recovery, costs and fees get paid first out of the total, “gross” recovery. That is to say, if a client wins $100,000, but various costs added up to $20,000, and the lawyers’ contingency fee was to be 40 percent of the recovery, the client might only get $40,000. If costs and fees are to be paid first, and if the defendant is unable to pay more than $50,000, it may be that the lawyers get paid 100 percent of the “net” recovery remaining and the client gets nothing.
These are of course extreme examples, and there is always a general limitation on all lawyer-client agreements that they cannot be so unfair as to be “unconscionable.” The more likely danger, if a law firm promises that clients pay absolutely nothing unless they recover, is the incentive that creates. A lawyer who could be out the costs of litigation once a case is filed has a strong financial incentive to settle the case before that ever happens. These days just to file a complaint in state court and have it served on a defendant can cost roughly $500. If a firm doing a high volume of business were advancing just those costs for its hundreds of cases, it would be investing hundreds of thousands of dollars in its clientele. It is much more likely that such a firm would prefer to settle the majority of its cases before they begin, without paying virtually any up-front costs for the clients. For the cost of a few phone calls, the firm can make tens of thousands of dollars on a case that, if seriously pursued for a while by a different firm with a different business model, might have yielded hundreds of thousands of dollars for the client.
Again, these scenarios are extreme examples in which a contingency arrangement may not be as beneficial as it at first seems. Moreover, for clients whose main interest is in putting their dispute behind them and who view the payment of court costs up front as too much risk to bear, the firm that usually settles quickly may be ideal. In fact, such a firm might still be willing to invest considerable sums in the unusual case in which a client’s misfortune promises a substantial recovery.
Also, if a firm quickly negotiates a settlement that is much smaller than the client believes the client is entitled to, there is no reason the client has to accept the settlement. In that event, of course, the high-volume lawyers might just decide to cease representing the client, and the client will be back to Square One with its legal problem. Situations have also arisen in which the contingency lawyer who did essentially nothing to work up a case claimed entitlement to payment anyway after substitute counsel was chosen. (And yet we wonder how lawyers got such a bad reputation.)
Reverse-Contingency Fee Agreements: OK in Theory - Are They Ever a Reality?
One of the more inventive alternatives to traditional hourly billing by law firms is known as the “reverse-contingency” fee agreement. The idea is supposed to work like this: Since a plaintiff can obtain legal services without paying attorney fees unless the plaintiff wins or obtains a settlement, why can’t a defendant negotiate a similar arrangement? Can’t a defendant obtain legal services without paying attorney fees unless it prevails or, at least, settles the case for less as a result of the attorney’s work? Shouldn’t it be possible for attorney fees to be based on a percentage of the amount the attorney saved the defendant?
The American Bar Association opined long ago that such a reverse-contingency arrangement is not unethical per se. Specifically, in Formal Opinion 93-373, the ABA Committee on Ethics and Professional Responsibility found nothing in the Model Rules of Professional Conduct and no public policy prohibited such agreements, so long as the agreements are reasonable. A number of state bar opinions have concurred that reverse-contingency agreements should be permissible in the right circumstances. See, e.g., District of Columbia Bar Opinion 347 (2009); Iowa State Bar Opinion 98-3 (1998); Kentucky Bar Opinion E-359 (1993).
Since then, and increasingly over the last few years, law firms big and small have touted the reverse-contingency agreement as a possible alternative solution for cash-strapped defendants. The idea may also appeal to defendants who believe the risk of paying fees up front could exceed the amount the plaintiff could realistically obtain at trial or in settlement.
No empirical studies appear to exist on how frequently reverse-contingency fee agreements have been used. But there is good reason to believe that, with one notable exception, use of this form of alternative fee arrangement has been a virtual nullity. The reason I say there is good reason to believe this is that, in all the time since the ABA’s opinion sanctioning the possible use of reverse contingencies, there have been very few cases in which such agreements have been upheld or invalidated.
In California, in Beard v. Goodrich (2003), the most the California Court of Appeal said was that a reverse-contingency fee agreement was “uncommon.” The court was not called upon to address other aspects of such an agreement, however. In Beard, the attorney was trying to claim that a standard contingency provision applied not only to recovery on a cross-complaint but also to the claims against the client in the complaint that were reduced to zero in the verdict. There was no actual written reverse-contingency agreement as such. Not surprisingly, the attorney was not permitted to enforce the reverse-contingency fee agreement that never was.
Similarly, Arnall v. Superior Court (2010) concerned an agreement that provided for a fixed fee plus a “success fee” of 2 percent of the amount of taxable income that was reduce based on the attorney’s advice. It was not an agreement that the attorney intended as a reverse-contingency fee agreement. The attorney was prohibited from recovering the “success fee,” nevertheless, because the court found that the agreement should be held to the standards of contingency fee agreements, which require certain disclosures that were not included in the agreement.
Outside California, in Brown & Sturm v. Frederick Road LP (2001) attorneys representing clients in a tax court proceedings negotiated an agreement in which the attorneys were to receive a percentage of the reduction they obtained from the IRS. The court invalidated the agreement, finding that the attorneys took advantage of their fiduciary relationship with the clients and concealed appraisals they had already obtained showing that the IRS’s valuations, on which the reverse contingency was based, were grossly inflated.
The most notable use of reverse-contingency agreements outside California has been in Florida. It has been reported that attorneys providing “foreclosure avoidance” services were billing clients on a reverse-contingency basis: the attorneys received 40 percent of the amount of the mortgage principal owing they were able to reduce through negotiations with or litigation against lenders. Most significantly perhaps, the arrangement was reported to be the subject of ethics proceedings against the attorney who drafted the fee agreements. Although the attorney was reportedly cleared of ethics violations, the enforceability of his agreements is among many other subjects of ethics probes against him. His “new business model” is therefore not likely one other attorneys would be quick to emulate.
Even for less “creative” attorneys than one in Florida, the risks in attempting to negotiate a reverse-contingency fee agreement are extreme. Although, as noted, the American Bar Association said that such agreements are not automatically unethical, to be considered “reasonable,” and therefore enforceable, the baseline from which savings are calculated is usually difficult to determine. Just because a plaintiff alleges it is owed millions of dollars doesn’t mean that the plaintiff’s demand is a reasonable starting point.
In fact, the DC Opinion cited above suggests that a plaintiff’s demand “may not be taken alone as the basis for a reverse contingent fee.” Instead, the likely liability amount is supposed to be determined based on the attorney’s analysis and experience, all of which is supposed to be disclosed to the client in detail. What this, in turn means, is not clear, except that, if large sums are involved, you can bet further rounds of litigation over fees will ensue — if all the firms advertising that they can offer reverse-contingency fee arrangements ever really do so in practice. The absence of reported cases suggests that such a practice does not exist. Either that or, outside the few opinions even mentioning reverse-contingency fees, the agreements have always worked out so perfectly that no clients have had any complaints, no matter how much money might be at stake.