April 01, 2017

Alternative Litigation Fee Arrangements: Pricing for a Win-Win Partnership

Henry Turner Jr.

Clients want results. And they want to know the amount they will be required to invest to obtain those results. Alternative fees infuse these concepts into the attorney-client relationship. As a partner with Valorem Law Group, a business litigation boutique, my experience is with alternative fees in commercial litigation. But many of these points apply to alternative fees for transactional work.

The structure of alternative fees is limited only by imagination but generally falls into two categories: contingency fees and fixed fees.

Contingency Fees

Contingency fees are familiar and often used by plaintiff’s counsel in personal injury cases. The mechanics are simple: the lawyer takes a percentage of the recovery as her fee. There are also “reverse contingencies” where lawyers receive a percentage of the amount saved. In a litigation context, this means that if a client has $1 million in exposure, then the lawyer gets a percentage of any resolution less than $1 million. And the structure can be graduated so that outside counsel get a higher (or lower) percentage the greater the savings. But because there is a risk of a complete loss, clients and outside counsel should scrutinize contingency fees like any investment.

Fixed Fees

Fixed fees are, in my experience, more common in defense work than contingency fees. The fixed fees can be for a portfolio of cases, a single case, or each phase of a case. The fixed fee should be the product of collaborative discussions between clients and outside counsel prior to engagement. Two concerns I have often heard clients express with fixed fees are that:

  1. Outside counsel will stop working when costs equal the fixed fee; or
  2. Outside counsel will only staff the case with cheaper, ill-suited labor.

Those concerns can be addressed by holding back a percentage of the fee until resolution. The holdback represents a material portion of the lawyer’s profit on the case, and its disbursement is tied to whatever outcome the client agrees is a successful result. In a simplified example:

  • the fixed fee is $100,000; and
  • the holdback is 25 percent to be paid when the lawyer secures the agreed outcome.

The lawyer gets $75,000 in the door on the fixed payment schedule and only gets the remaining $25,000 if achieving the desired result. The client gets cost certainty. And outside counsel has the incentive to manage its resources to not spend more than $75,000 to get the desired result. This often means using experienced but more costly personnel who can efficiently achieve the desired result. For my firm, the holdback shows clients that the firm is sharing clients’ risk and betting on our ability to get the best outcome for them.

The fixed-fee model can be altered in several ways:

  • Lower fixed fee with a higher percentage of the outcome when cash stream is an issue for the client but likelihood of success is high;
  • Flat fee for each month the case is alive but with a performance bonus to resolve a case at certain times, creating an incentive for the lawyer not to “sit” on the case; or
  • Different tiers of fixed fees, with each tier having an agreed scope of work. The higher the tier, the more services are included, lessening clients’ risk but increasing their investment. For example, Tier A includes three depositions at $15,000, and Tier B includes five depositions at $25,000. Choosing Tier A risks not deposing two people who may know key facts. But the additional $10,000 cost may not be worth the client’s investment in light of the potential damages at stake.

There are other structures but the principles are the same: (1) budget certainty for the client; (2) shared risk; (3) managing costs and risks relative to the client’s investment; (4) fixed revenue for the lawyer; and (5) a financial incentive to get the client’s desired and agreed outcome.

Alternative fees share risks of litigation between clients and their lawyers. Clients are comfortable with risk. They know nothing in life is certain. But they still need a result. Structuring alternative fees requires open and up-front discussions between clients and outside counsel. But such discussions are the hallmarks of any partnership and help marry outside counsel’s process with the client’s desired result.

Henry Turner Jr.

Henry Turner Jr. is a partner with Valorem Law Group LLP in Chicago, Illinois.