Hourly fee agreements
A traditional hourly fee engagement is an agreement between a client and a law firm, where attorneys, paralegals and legal assistants are paid by the hour for the work they perform. Each attorney, paralegal, or legal assistant who works on a case records his or her time for each task, typically in increments of 1/10 of an hour, or 6 minutes. Approximately every month, the client receives a bill for the legal services provided (and expenses incurred) during the previous month. A bill consists of a list of entries showing the date, the timekeeper, a brief description of the tasks performed that day, and a figure consisting of the hourly rate multiplied by the amount of time spent that day. Occasionally, these amounts are adjusted or capped if a task requires an inordinate amount of time. This bill is presented to the client for payment, either by mail or email. If the client has paid a retainer, we may pay the bill from the retainer and either request replenishment of the retainer, or bill for a balance due if the retainer was insufficient to cover the amount of the bill.
Alternative fee arrangements
Fortunately for both clients and law firms, there are a number of alternative fee arrangements (AFAs) that can be entered into. These alternative fee agreements allow the clients to pay for legal services other than by the traditional billable hour. The variations are almost unlimited.
AFAs are a way to spread the risks and rewards of litigation. In the appropriate case, legal fees should reflect the value the client receives from the representation, as opposed to the time the law firm spends on the case, while still allowing the law firm to make a profit. An effective AFA aligns the client’s interests and the law firm’s interest.
Some clients desire an AFA in order to help them better manage their budgets and financial risk by sharing with their attorneys both the risks and the rewards of a lawsuit.
For individuals, families or small businesses, contingent fee agreements or other AFAs may be the only way that the clients can obtain access to justice.
Contingent fee agreements
In a contingent fee agreement, the client’s obligation to pay the law firm an attorney fee is contingent on the law firm recovering a settlement or judgment for the client. If we lose the case, the client owes no attorney fees, and is usually responsible only for the litigation costs. The law firm’s fee is usually a percentage of the amount recovered by way of settlement or judgment.
In the proper case, both we and our clients can benefit from a contingent fee agreement because our interests are aligned with those of the client. We each want to see the other achieve a positive and meaningful result.
We routinely enter into contingent fee agreements with individuals and with businesses too. When businesses need to bring a lawsuit, a contingency fee agreement allows the client to manage budgets, cash flow and risk. Contingent fee agreements provide access to justice for individuals and companies who could not otherwise afford to litigate. But in some cases, even very financially successful people or businesses could not afford to pursue a lawsuit without a contingent fee agreement or some other alternative fee arrangement.
A contingent fee percentage is typically from 25% to 40% of the amount recovered for a client, though it can be higher or lower depending on the particular case. There are many reasons why the contingency fee percentage may vary. For one thing, not all cases pose the same risk or offer the same reward to the client and lawyer. Some cases are not as complex as others, and sometimes the client’s particular circumstances may influence the amount of a contingency fee percentage. For a simple breach of contract case, our contingent fee percentages might range from 20-25% to 33 1/3% of the recovery. For more difficult and high-risk cases, our contingent fee percentage can range up to 45% of the recovery.
In certain appropriate cases, we will agree to a contingent fee arrangement where there is a different percentage corresponding to when the case yields a recovery. For example, the fee agreement might provide that if the case settles before filing, the contingency fee will be 20%, if it settles after filing but more than 30 days before trial, the contingency fee will be 33-1/3%, and if it yields a recovery after trial or appeal, the contingency fee will be 40%.
The nature of the contingency fee arrangement requires that we select contingent fee cases carefully. We cannot accept every case on a contingency basis, or agree to do every contingency case that is offered to us. We owe it to our clients and to ourselves to analyze every potential contingency fee case very carefully before agreeing to proceed on that basis.
With some complex business and legal malpractice cases, often involving thousands of pages of documents or court records, we offer clients the opportunity to hire us on an hourly or fixed fee basis to analyze the case. In connection with that pre-suit analysis, we may recommend that the client hire one or more experts or consultants to help. By dedicating a relatively small amount of time and money up front, the client can make an informed decision about whether to proceed with the lawsuit, and we can make an informed decision about whether we want to accept the case under a contingent fee or other alternative fee arrangement.
Contingency fee agreements are not suitable for every type of case or every situation, even where the client has an excellent chance of winning. For example, if you are the defendant in a case, a win might be getting the case dismissed or obtaining a verdict in your favor, but these victories mean only that you do not have to pay a judgment or settlement. The victory does not generate any fund from which the attorneys could collect a contingent fee, so a contingent fee agreement would not be appropriate in such circumstances.
Moreover, even if a case is suitable for a contingent fee agreement, we must carefully manage our resources. Thus, we do not accept contingent fee cases where we believe that the case will be so demanding as to interfere with our ability to represent other clients, or too significant a drain on our resources, or where the potential return on our investment of time and money will not justify the risk. In such circumstances, we may represent the client on a traditional hourly fee basis, a hybrid contingent fee-hourly fee basis, or with other AFAs. We may also partner with other law firms to spread the risk and the reward.
What if a we take a case on a contingency fee agreement and the client gets sued in a counterclaim?
When we represent a plaintiff, we always try to foresee and anticipate how the other side will defend a case. Sometimes, that defense will include a counterclaim. A counterclaim is when a defendant in a lawsuit decides to sue the plaintiff for some perceived wrong that is usually related in some way to the circumstances that gave rise to the plaintiff’s claim, but isn’t always. If the dispute between the parties consisted only of the counterclaim, we would not represent the plaintiff on a contingency basis because when we are defending a claim, there is no sum of money that is generated by a successful defense from which attorneys fees can be paid. When it is clear that a counterclaim will be asserted against a client, we usually provide in our written fee agreement how that will be handled. Sometimes, there will be no extra charge for attorney fees related to defending the client on the counterclaim. Other times, it may be appropriate to anticipate that the counterclaim could take on a life of its own, and in such cases, the fee agreement will provide for a method of payment for the defense of the counterclaim. This could introduce an hourly component to the fee agreement, or a reverse contingency fee or success fee. Sometimes, we are unable to foresee the counterclaim and account for it in the fee agreement. If the counterclaim becomes the major dispute in a case, and poses the biggest risk to the client that is outside the scope of work defined in the contingency fee agreement, we would amend the fee agreement to ensure that we are compensated by the client for this important assignment.
Reverse contingent fee agreements
A reverse contingent fee agreement can be used when a client is a defendant in a lawsuit, has a clearly defined financial exposure, and is at risk to lose the case. If we agree to represent the client under a reverse contingent fee agreement, the client agrees to pay a contingent fee that is an agreed-upon percentage of the difference between the client’s predetermined financial exposure and the final amount of any judgment or settlement that the client pays. For example, if the client’s pre-determined financial exposure is $5 million, and, after litigation, we negotiate a settlement for $2 million, the client would pay us a percentage of the $3 million savings as the reverse contingent fee. On the other hand, if the client is found liable at trial for the entire $5 million, then the firm would receive nothing by way of attorney fees. A reverse contingent fee agreement such as this also can be used as part of a hybrid fee agreement, where the client agrees to pay a lower hourly rate, or a monthly flat fee, and agrees to pay a percentage of the savings as a reverse contingent fee.
Reverse contingent fee agreements allow clients to budget and manage risk, but their success depends on the client’s ability at the end of the day to pay the reverse contingent fee.
Hybrid fee agreements
As its name implies, a do-not-exceed agreement is a fee agreement in which the law firm agrees to cap legal fees at a pre-determined amount. These agreements are most appropriate for discrete projects, such as research projects, formal legal opinions or pre-suit investigations and analysis. We bill by the hour for our services but agree in advance that that legal fees will not exceed the cap without the client’s written permission.
If we are required to engage outside consultants or expert witnesses to conduct our analysis for a project undertaken pursuant to a do-not-exceed agreement, our written agreement with the client will provide that such consultant expenses are outside the negotiated do-not-exceed cap.
Fixed or flat fee agreements
In a fixed fee agreement or flat fee agreement, the client pays a fixed fee for the legal representation, regardless of the time the attorneys and staff put into the case, and regardless of the outcome. These agreements fix the amount of legal fees only. Any costs and expenses incurred in the representation would be in addition to the fixed or flat fee, and our firm may have little or no ability to control those costs and expenses.
A flat fee agreement is a type of open-ended fixed fee agreement, similar to a monthly retainer. In a flat fee agreement, the client agrees to pay a monthly flat fee for the legal representation regardless of the time the law firm puts into the case during the month. Flat fee agreements can work well in a major case in which a team of attorneys and paralegals will be spending substantial time on the case each month, or where there are a series of similar major cases. For budgeting purposes, a flat fee agreement can be very beneficial to both the client and the law firm. As with the fixed fee agreement, this type of arrangement typically applies only to legal fees, and not to costs or expenses.
A holdback or success fee arrangement is similar to a hybrid contingency fee. Under these agreements, the law firm may issue monthly hourly bills to the client, but agrees that the client must only pay a reduced percentage of those fees as the matter proceeds. If the matter is successfully concluded in a manner that the firm and the client agree upon in advance, the law firm is paid a success fee in the form of a percentage of the held-back amount. This percentage can be less than the entire hourly rate, or it can have a bonus feature, where the percentage is greater than the face hourly amount. This type of fee agreement can work for plaintiffs as well as defendants, and is particularly useful in litigation where the results may involve non-monetary relief, such as injunctions, restraining orders or recovery of intangible or non-liquid assets, such as intellectual property or shares of non-publicly traded stock.
A retainer is an amount paid by a client to retain the services of an attorney or law firm. Most commonly, it refers to an amount paid by a client to secure the payment of legal fees. When a retainer is paid by a client to a law firm, the law firm has not yet earned the money, and it remains the client’s money, held in trust by the law firm, until the money is earned by the lawyer or used to pay expenses incurred by the law firm on the client’s behalf. If at the end of the engagement, there is money left in the retainer, it must be returned to the client.
Sometimes, we will ask that a client maintain a certain amount in the retainer, after each monthly or periodic bill for attorney fees and expenses has been paid. This is sometimes referred to as an evergreen retainer. An evergreen retainer ensures that when litigation goes on for months or years, as is often the case, a client never falls behind on bills that can mount quickly.
At Cohen Rosenthal & Kramer LLP, we do not consider a retainer to be a fixed fee. In other words, just because the client pays a retainer up front does not mean that client will not owe legal fees and costs beyond the amount of the retainer. Nor is a retainer a budget, estimate or prediction of what we think the costs and legal fees for a particular lawsuit will be. A client should never assume that because we ask for a retainer in a specific amount, that is all that a lawsuit will cost. It is not.
Litigation costs are the expenses incurred in a lawsuit other than attorney fees. If the lawsuit is brought in court, the court will charge a filing fee to the plaintiff or plaintiffs who file the suit. This is usually between $200 and $500, and is typically considered a deposit against the total costs the court accrues as the case progresses. At the end of the case, the court may submit a bill to one or more parties for items such as expenses for serving the complaint, for maintaining or digitizing the file, for court reporters who may attend hearings or trials and who prepare transcripts, and for jurors if the case is tried to a jury. In arbitration, expenses can include the filing fee required by the arbitration forum. Two of the larger arbitration forums are the American Arbitration Association (“AAA”) and JAMS. Depending on the type of case involved, the amount of money in dispute, and the terms of any arbitration agreement, these arbitration forums will charge one or both parties a filing fee in order to commence an arbitration. Then, once an arbitrator or arbitrators are appointed to hear the case, those arbitrators are paid by the parties to the arbitration. An arbitrator often charges from $200 to $800 an hour, and many arbitrations are heard by a panel of three arbitrators, which obviously triples the expense. Since arbitration is a private form of dispute resolution, it is often necessary for the parties and arbitrators to rent a conference room in an office or hotel in which to hold the hearings, and there is often an expense involved which the parties ultimately must pay.
Other major expenses of litigation include copying or scanning documents which the parties must gather and provide to each other; court reporters, who attend and transcribe depositions, hearings, trials and arbitrations; and expert witnesses. Almost all cases these days involve expert witnesses, and often more than one per side. For example, financial experts are often engaged in business disputes to render opinions about the economic impact of the conduct in dispute, or in employment and wage disputes to calculate the amount of the plaintiffs’ damages. In a legal or accounting malpractice case, expert witnesses may be required to render an opinion about the standard of care which the professional should have followed. Depending on a variety of factors, these expenses can run to many thousands of dollars, or even more.
Incidental expenses include such things as computerized research, messenger and overnight delivery services and local and out of state travel for the lawyers, parties or witnesses.
The challenge in every lawsuit is to find a way to seek justice without breaking the bank. Litigation quickly becomes pointless if the fees and expenses a client incurs are greater than any benefit that can be obtained. For this reason, we have entered into a number of different types of fee agreements with clients, depending on the circumstances of each case. We would be open to discussing any of these various options with you to structure an arrangement that works for both you or your company, and our firm.
In most situations, we ask that clients pay litigation costs if the client has the ability to do so.
Unless we have agreed to advance litigation costs on behalf of a client, we will generally pass on invoices to a client for direct payment. For example, if we receive an invoice from an expert witness, or a court reporter, we will generally forward the invoice to the client for direct payment. For smaller advances or when necessary for other practical reasons, we may advance the cost on behalf of the client, and then invoice the client for the cost that we have advanced.
If the client does not have the ability to contribute to litigation costs, and we agree to take the case, we may agree to advance the client’s litigation costs. However, we require the client to repay us those costs advanced when we recover by way of settlement or judgment.