Contingent fee agreements. Are they a good thing?

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What is a contingent fee agreement?

The contingent fee agreement, for those who need a primer, is that type of contractual agreement for legal services in which payment of an attorney’s fee is dependent (“contingent”) upon the successful outcome of the case in question. You’ve all heard about this thing on TV, usually featured prominently in TV lawyer’s ads which proclaim “you don’t owe us a penny for fees unless we win your case”. And basically, it is what it purports to be. If the attorney is successful in handling the case, either by settlement or after trial, if he “wins” money for the client, the attorney is paid, usually a percentage of the gross recovery. If not, not. Simple enough. (I note as an aside that usually there is some fine print provision such that costs related to handling the case may need to be advanced to the attorney or that whatever happens with the case the client is nonetheless responsible for reimbursing those.)

Is it fair?

On the one hand, contingent fee agreements seem at first blush a pretty good deal. Where an attorney might otherwise charge a hefty per-hour fee and require that a retainer be paid up front (and billed against), a contingent fee agreement seems like a great alternative. The client need not pay anything for the attorney to take the case and begin work. Furthermore, often written into that same agreement is a provision such that the attorney may even advance the costs associated with representation (like for copies of medical records, or the costs of filing a lawsuit, or investigation, perhaps) and then just get paid back after the case is resolved favorably. A pretty good deal all around when you consider that plenty of attorneys have no problem billing better than $200 an hour for their work. Lots of folks just don’t have the dough to pony up and pay a retainer in such per-hour arrangements. Furthermore, unlike per-hour arrangements, with a contingent fee agreement, if the case goes badly (if the lawyer doesn’t “win” or is not “successful”), the client isn’t saddled with the bill (at least for attorney fees). So it’s like having a money-back guarantee, sort of. No play, no pay.

So what’s not to like about it?

While the contingent fee agreement seems like a good deal because it’s a “no money down” kind of arrangement and has a built in guarantee (no win = no pay), a couple things must be considered.

First, exactly what is the amount of the attorney fee involved in the agreement? That is, how much, in terms of percentage of the gross recovery (the total amount “won for” or “awarded to” the client) is the attorney charging? With personal injury cases the industry standard is 33%, and I have seen the agreements go as high as 40% or more. So what that means is, assuming say, a smallish case where the attorney “wins” a settlement of $3,000, one third, or $1,000.00 will be considered “fee” and paid to the attorney at the conclusion.

It’s more expensive than traditional hourly fees

What many attorneys want to keep to themselves however, is that in terms of the time actually spent dealing with the case, a 33% fee may equate to a fee which, if thought of in terms of hourly rates, would be so outrageous that no one in their right mind would pay it.

I have in fact discussed this with some of my fellow attorneys, in a bold moment, and the response I get has been unwaveringly consistent each and every time:

contingent fees are higher than the corresponding hourly fees would be precisely because they are “contingent” in nature, and depend upon the successful outcome of the case.

The client may not have to pay anything at all (if the case goes poorly) yet the attorney must invest all his time and best efforts whether or not he gets paid. In other words, the attorney is taking a gamble by taking on the case and investing all of his time and effort, even to the exclusion of other “guaranteed pay” work, where he may be able to charge by the hour. The uncertain nature of this “gamble” then somehow makes it “fair” that the attorney should charge a higher rate—contingently—than he would charge per hour. Compelling, if I say so myself.

The risk the lawyer takes with a contingent fee case is minimal

The problem with this defense—and this is the second big problem with the so called contingent fee agreement—is that attorneys who take these cases look very closely at the facts of the cases to determine whether or not there is a good likelihood of success. Indeed, some would say that these cases are vetted so carefully that there is not much in the way of “contingency” about them; the case will go satisfactorily, the client will be paid, and the attorney may even in the beginning of the representation have a very good idea of about how much will be awarded.

If that is so—and it is—the argument that the “contingent nature” of the case deserves a comparatively high fee simply fails. Additionally, while it may have been true many years ago that attorneys who took on contingent fee cases had to refuse other pay-per-hour gigs to make time for the “contingent” case (and thereby saw their incomes decline), those days are long gone. Most of the contingent fee cases that are handled nowadays are personal injury (plaintiff) cases, and the vast majority of personal injury attorneys simply don’t do pay-by-hour cases. So the argument that there really is a “lost work opportunity” that compels a higher contingent than hourly fee, fails too.

So what’s the upshot?

Well, it’s not that the contingent fee agreement needs to be abolished, that’s for sure. Because of the contingent fee agreement, many meritorious cases are tried and many valid claims brought which would otherwise languish and die if their litigants had to pay an attorney’s retainer to go to bat.

A need to act responsibly and ethically

But there is, in my opinion, a need for attorneys to act responsibly and ethically when these agreements are used. This may require some careful soul-searching and answering just a few simple questions. For example:

“What is the case’s likelihood of success?”
“Can the case be readily settled or will it probably require ‘heavy lifting’ litigation or appeal?”
“Does the case require some specialized knowledge or expertise that this attorney has?”
“Will the attorney handling the case actually forgo other opportunities to work by taking the case and will his business income decline because of it?”
“What would the fee look like if assessed based on hours of work put into the case and is that number defensible (with a straight face)?”

Contingent fee agreements are not in themselves bad, but attorneys who use them would be well advised to consider their actions carefully.