Lawyer James Denison | Top Attorney Litigation

Litigation, Arbitration & Appeals

Alternative Fee Arrangements and Other Ways to Keep Litigation Costs in Check

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 for free until 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.  Seee.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, or to approve of an actual reverse-contingency agreement. 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 the 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 would ensue. The absence of reported cases suggests that the use of reverse-contingency agreements in practice is a rarity.

James Denison