January 30, 2023 Column
Dividing Contingency Fees after a Lateral Move
Lawyers should try to work out an agreement, because no one—including judges—likes to see lawyers fighting over money.
Michael Downey
“Congratulations,” Ethox greeted Paradox. “I hear your solo practice has grown.”
“Yes,” Paradox smiled. “My cousin has joined from Litigators Ltd. In fact, I have a question about this.”
“I would be happy to help,” Ethox responded, “if I’m able.”
“My cousin brought several cases to our firm from Litigators Ltd.,” Paradox responded. “They were being handled on a contingency fee, and we continued that practice—with new engagement agreements—at our firm.
“One case is now approaching settlement,” Paradox continued. “My cousin reached out to Litigators Ltd., asking for their expenses and hours worked, so we could figure out Litigators Ltd.’s quantum meruit. Litigators Ltd. said they had not kept time records but should instead receive a portion of the contingency fee. Are they right?”
“Yes,” Ethox said, “Litigators Ltd. probably is entitled to receive a portion of the contingency fee as its quantum meruit.
“Quantum meruit is Latin for ‘how much he or she has earned,’” Ethox explained. “The aim should be to calculate the reasonable value of a lawyer’s services on a matter. It does not necessitate using time worked multiplied by a reasonable rate.
“In fact,” Ethox continued, “using time worked could result in injustice on a proportionate contingency fee matter. Suppose, for example, that Firm A was handling a matter on a 40 percent contingency. Firm A originates the case and puts in 100 hours of work. Then the matter is transferred to Firm B, which puts in 50 hours of work. Suppose also that the reasonable value of all hours worked, to keep it simple, is $200 per hour.”
“OK,” Paradox agreed.
“The case settles and generates $15,000 for Firms A and B to share,” Ethox continued. “If Firm A’s quantum meruit share is calculated by multiplying the 100 hours worked times the $200 reasonable rate, Firm A would be entitled to $20,000. Since the total attorney fees are only $15,000, Firm A would get the full $15,000, and Firm B would get nothing.
“Alternatively, suppose the settlement generates $100,000 in attorney fees,” Ethox offered. “Then, if Firm A received only that same $20,000 in fees—the 100 hours multiplied by $200 per hour—Firm B would be getting $80,000, or effectively $1,600 per hour.”
“It would be unfair,” Paradox interjected, “that Firm B would get four times more for only half the work—or eight times the reasonable rate—when Firm A originated the case and did more work.”
“Exactly,” Ethox responded. “It would be fairer to all, more equitable, if both Firm A and Firm B split the fee based on their contribution to obtaining the settlement for the client.”
“So Firm A would get two-thirds of the fee and Firm B would get one-third of the fee,” Paradox offered, “because Firm A worked twice as many hours on the case as Firm B did?”
“Not necessarily,” Ethox answered. “The U.S. Court of Appeals for the Eighth Circuit recently explained in a 2020 decision, Napoli Shkolnik PLLC v. Toyota Motor Corporation, 955 F.3d 745, that quantum meruit is distinct from an hours-based computation. Courts therefore look at a number of factors to decide how much each firm has earned. Under Minnesota law, for example, courts consider the time and labor required; the nature and difficulty of the responsibility assumed; the amount involved and the results obtained; the fees customarily charged for similar legal services; the experience, reputation, and ability of counsel; and the fee arrangement existing between counsel and client, if any.”
“So must a court decide the two firms’ shares?” Paradox asked.
“Not necessarily,” Ethox answered. “If the two firms can work something out, normally their agreement would be undisturbed. Perhaps Litigators Ltd. will agree about splitting the fee evenly. Lawyers should try to work out an agreement, because no one—including judges—likes to see lawyers fighting over money.”
“That certainly seems like good advice here,” Paradox agreed. “Would you help us negotiate with Litigators Ltd.?”
“I would be happy to,” Ethox answered.