5 Tips for Determining Your Contingency Fees

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As a Family Law attorney, do you know what I like most about contingency fees? I never have to deal with them. Most states and the ABA Model Rules prohibit lawyers from using a contingency fee in most Family Law cases and all criminal law cases. If you practice either of these fields, you might be better off checking out our handy post on flat fees instead.

However, for most lawyers—especially personal injury and worker’s compensation warriors—why wouldn’t you love contingent compensation? Contingency fees allow you to get paid (because many slip-and-fallers don’t have money for an hourly rate retainer). Also, you may end up with a case that pays nothing. Or you may end up with 40 percent of a multi-million dollar verdict—the latter would take an unfathomable amount of billable hours to reach the same payout. A contingency-based practice can be lucrative for those who can stomach the risk. Contingency fees allow you to serve clients that otherwise couldn’t afford your services.

But how do you set your contingency fees? And how do you know if your contingency fees are reasonable? Read on to find out.

Two legal professionals discussing contingency fees

1. Ask your mentors and peers

My advice on any legal question is to start with the statute or rule book. Of course, even if you read the rules, you probably  won’t come away with a clear answer to “What is reasonable?” Most of the rules don’t have a solid number–they usually include factors like the riskiness of the case, the amount of time it will take away from other cases, etc.

Start by asking mentors and colleagues. Yes, the “what’s your hourly rate?” and “what are your contingency fee percentages?” questions are awkward and tricky to ask. But lawyers need to be comfortable making uncomfortable requests. And if that person is your mentor or your trusted colleague, they certainly won’t mind.

An attorney researching stat contingency fees

2. Check your state’s rules

Take your mentor or colleague’s suggestions for contingency fees and compare them against the rules.

This may seem obvious. But we’ve all met lawyers who never consult a statute, a case, or the ethics rules. Instead, they just download template forms off of the internet. Plus, rules change.

For—an admittedly obscure—example: California’s Business and Professions Code § 6147, which sets forth statutory requirements for a contingency fee agreement, used to apply to plaintiffs and litigation matters only. The requirements did not apply to transactional cases or defendants (the reverse contingency fee discussed below). The switch tripped up an attorney in Arnall v. Superior Ct. (Liker) (2010) 190 Cal. App.4th 360, whose contingency fee agreement in a transactional matter failed to comply with the statutory requirements.

For another example: Florida. I tried to understand their Joyce-ian Rule 4-1.5 on reasonable fees and contingency fees but then realized that (a) I don’t live in Florida, (b) the rules stretch onward for 22 pages (including sample forms). If you do live in Florida, that’s twenty-two pages of ethical traps that you could fall into if you fail to check your state rules before you practice.

3. Weigh more factors than a Sandra Day O’Connor constitutional test

You have a percentage that you borrowed from your mentor. And you’ve got your state’s rules handy. What’s next? It’s time for the “only lawyers could make things this complicated” weighing-of-factors test! You’ll want to make sure you comply with the requirements for a contingency agreement and any state-required tests for a reasonable fee generally.

To return to our painful example, Florida has eight distinct factors for weighing the reasonableness of a fee. And six more for weighing the reasonableness of a cost that you pass on to a client. Plus, there are a separate set of rules for contingency fees. The rules set forth obvious requirements (in writing) and a schedule of what is reasonable absent court approval. With breakdowns by the amount and when the case is resolved (pre-answer, post-answer, when the defendant admits liability, when the case is appealed, etc.). And there’s a waivable element of the Florida Constitution that caps contingencies in medical malpractice cases.

Conversely, ABA Model Rule 1.5 on Fees has eight factors for generally determining the reasonableness of fees. The rule also includes a few special requirements for contingency fees, and that’s pretty much it—no 22-page odyssey to find the reasonable fee there.

4. Scrutinize the odd ones—hybrids and reverse contingency fees

You’re not sick of contingency fees yet, are you? Because we still have to deal with hybrid fee arrangements and reverse contingency fees.

Hybrid fee agreements

A hybrid fee arrangement typically includes both (1) a fixed (often hourly) rate and (2) a fee based on a favorable outcome. In the aforementioned California case of Arnall, the court, in reaching its holding that hybrid agreements had to comply with rules for contingency agreements, stated:

The term “contingency fee contract” is ordinarily understood to encompass any arrangement that ties the attorney’s fee to successful performance, including those which incorporate a non-contingent fee based on a fixed rate of payment. (Arnall, at 373)

In short: hybrid agreements are contingency agreements and need to meet the state-prescribed requirements, no matter how small the contingent “bonus” might be. (Arnall dealt with bonuses of 1 and 2 percent across two separate agreements.)

And attorney learning about contingency fees

5. Educate yourself on reverse contingent agreements

The basis of reverse contingency agreements is on how much the client avoided loss. For example, picture a defendant who was issued for $2.7 million, but his lawyer negotiates a settlement for only $100,000. That’s a massive win for the defense. A reverse contingent fee would give the defense lawyer a cut of the savings of $2.6 million.

The problems are plentiful with these kinds of arrangements. For one, plaintiffs are nuts. They ask for insane amounts because hope springs eternal in the plaintiff’s lawyer’s breast. In the above example, the defendant might not have saved $2.6 million if we are talking about the actual value of the case—a “real” judgment might have only been worth a few hundred thousand dollars.

Do you see the problem? Trying to figure out what is “reasonable” in such a case is extremely difficult. However, reverse contingent fees are not outright impossible. At least under the ABA rules—your state may vary: ABA Formal Opinion 93-373 allows these odd fees so long as “the amount saved is reasonably determinable, the fee is reasonable in amount under the circumstances, and the client’s agreement to the fee arrangement is fully informed.”

Will the client pay it? Get informed consent for contingency fees. 

When it all comes down to it, the real question is this: Will the client pay the fee without complaining to the state bar? That may sound a bit cynical. But assuming that you have explained the risk inherent in the case, getting informed consent for contingency fees shouldn’t be too big of an issue. Obtaining informed consent should also insulate you from later complaints about your “unreasonable” fee. By the way, the risks inherent to the case could be the particular difficulties in securing a victory, the amounts at stake, etc. 

Many states require such informed consent and a statement that “the fee is not set by law but is negotiable between attorney and client.” These safeguards protect the client from thinking that the “standard 60% contingency” is required by law. These requirements also safeguard attorneys from having to defend their fee agreements in front of ethics boards.

Conclusion

Contingency fees or not, putting the client at the center of your practice will undoubtedly benefit everyone. Considering alternative fee arrangements is a big decision. But, it’s also a decision you should make as a legal professional and business owner.  

Categorized in: Business

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