Contingent Fees A Great Option For Cos. During Downturn

By Tommy Jacks, David Morris and David Hoffman
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Law360 (May 20, 2020, 6:01 PM EDT) --
Tommy Jacks
Tommy Jacks
David Morris
David Morris
David Hoffman
David Hoffman
Are you a candidate for contingent-fee litigation? Consider some of these scenarios to determine if it might be right for your company.

You're an engineer who founded a technology-based business with great hopes. Despite a lean budget, you've gone to the expense of protecting your inventions through patents. And now a competitor — perhaps a better-funded competitor — is using your idea.

Or maybe you're general counsel at a growing company with a carefully guarded customer list and a proprietary business process, and a former employee has now shared that trade secret information with a competitor in defiance of a nondisclosure agreement.

Perhaps you're the head of a small business that has just lost its main source of revenue when another company convinced your supplier to sell to them instead of you, despite a binding agreement you've worked under for years. This tortious interference with your contract threatens to destroy your company in short order.

As chief litigation counsel at a major corporation, you've identified serious wrongdoing by another party in a business dispute. However, with decreasing revenues due to the COVID- 9 pandemic, your leadership team is reluctant to sign up for the cost of additional litigation, even though a win would be great for your company.

Now, can you afford a seven-figure litigation budget to protect your rights? If you cannot answer this question without hesitation, maybe it's time to consider a contingent-fee arrangement. Whether it's an uncertain economy, or because of where your business is in its life cycle, or simply because you'd rather spend money on product development instead of legal fees, a contingent-fee arrangement might be worth considering. Here are some things to think about.

Some Common Misperceptions

Let's face it: you want only the best of the best trial teams to handle your litigation, and you assume the "elite" firms will turn up their noses at the idea of a representing you on a contingent-fee basis. Think again. Many, if not most, of the premier litigation firms in the country regularly take on all sorts of high-stakes cases on a contingent-fee basis.

And the variety of the types of contingent fee cases that firms will handle covers the waterfront, from patent infringement to antitrust to theft of trade secrets to breach of fiduciary duty or breach of contract — you name it. As with so many things, if you don't ask about the availability of a contingent-fee arrangement, the answer is always "no."

Or perhaps you're afraid a "pure" contingent-fee arrangement will work to your company's disadvantage — there could be an earlier than expected settlement and you'll end up paying more on legal fees than you would have paid on an hourly fee basis. But in making any choice of how to pay for a case, you will have to make a risk/reward assessment upfront, just as your law firm will. When doing so, there are any number of "hybrid" fee arrangements you can consider where the law firm's percentage share of a successful recovery is smaller, as is the "hourly" rate for the traditional component of the hybrid arrangement.

Finally, maybe you are concerned that a firm that isn't being paid for its work as it works will work less or assign its "B-team" to the case, giving you subpar service. But this simply isn't the case in firms with significant contingent-fee practices. They have track records of managing contingent-fee cases, and their teams and strategies are focused on obtaining a win.

Contingent-Fee Arrangements: The Basics (and More)

The Three-Legged Stool

Every contingent-fee case must begin with ensuring that all three legs of the "three-legged stool" are in place:

  •  Solid liability, including both the evidence and the applicable law;
  •  A strong damages case;
  •  A solvent (or, in an appropriate case, well-insured) defendant.

A Rigorous Vetting Process

Each of these three legs must be thoroughly investigated and vetted during the initial case review process. This will benefit you and your proposed counsel in understanding the strengths and weaknesses of your case and whether it is appropriate for a contingent-fee arrangement.

Indeed, one of the inherent benefits of approaching competent counsel about handling your case on a contingent-fee basis is that, unlike the firm that will receive its hourly fees win, lose or draw, the firm that is weighing whether to accept representation on a contingent-fee basis will leave no stone unturned in performing its presuit investigation of the case.

That doesn't mean that the client in every contingent-fee engagement will inevitably emerge victorious — every sizeable, complex case involves multiple risks — but the client who retains experienced counsel on a contingent-fee basis can be assured that the legal team has thoroughly explored all foreseeable pitfalls before agreeing to accept the representation.

The Terms of the Engagement Agreement

The rules of professional ethics of the various states vary somewhat, but in most jurisdictions there is some regulation of contingent-fee arrangements. The American Bar Association Model Code provides, in Rule 5(c):

A contingent fee agreement shall be in a writing signed by the client and shall state the method by which the fee is to be determined, including the percentage or percentages that shall accrue to the lawyer in the event of settlement, trial or appeal; litigation and other expenses to be deducted from the recovery; and whether such expenses are to be deducted before or after the contingent fee is calculated. The agreement must clearly notify the client of any expenses for which the client will be liable whether or not the client is the prevailing party. Upon conclusion of a contingent fee matter, the lawyer shall provide the client with a written statement stating the outcome of the matter and, if there is a recovery, showing the remittance to the client and the method of its determination.

As for the particular terms of a contingent-fee arrangement, those terms will vary depending upon any number of factors, including, for example:

  •  The complexity and level of risk involved;

  •  Whether the client is bearing some or all of the out-of-pocket expenses; and

  •  In a "hybrid" contingent-fee arrangement, whether the client is paying a discounted hourly fee (and, if so, how much the hourly fees are discounted and whether there is a "cap" on their amount).

The Types of Cases Firms Handle on a Contingent-Fee Basis

While not every plaintiff's case lends itself to being handled on a contingent-fee basis, a wide variety of lawsuits can be, and frequently are, pursued on a contingent (or hybrid of contingent and hourly, also known as partial contingency) fee basis. For example, attorneys in our firm have undertaken contingent-fee representation in the following types of cases, among others:

  • Patent infringement litigation, including handling inter partes review proceedings before the Patent Trial and Appeal Board: These cases must be thoroughly investigated. Does prior art exist that could upend the case? What is the scope of the patent's protection? Does the potential defendant's product actually infringe? What can we expect to recover as damages? All of these questions need thorough and effective due diligence by an experienced legal team, especially when that legal team has a big stake in the case's eventual outcome. It is worth noting that the best patent litigation firms will not take on cases for nonpracticing entities that buy patents for the sole purpose of using lawsuits to exact settlements from active businesses.

  • Trade secrets cases: Here, presuit investigation is also vitally important. Were your trade secrets really adequately protected? How solid is the evidence that the competitor you contemplate suing was actually in possession of your trade secrets? How can you show they didn't develop them independently (or through legal means, including reverse engineering of your product, which is generally not an illegal activity)?

  • Commercial cases: This includes tortious interference with contracts, unfair competition, deceptive trade practices and antitrust violations, to name a few.

  • Federal and state False Claims Act cases: These generally prove to be hard-fought cases, and few whistleblowers have the resources to pursue them except through contingent-fee arrangements with counsel.

Contingent-Fee Arrangements as an Alternative to Third-Party Funding

In the current litigation environment, many companies are entering into agreements with third-party funding companies to help defray the expense of litigation. While third-party funding certainly makes sense in some cases during a time when many companies' litigation budgets are tight, in an appropriate case, contingent-fee arrangements, either "pure" or "hybrid," may end up being a simpler, less expensive and ultimately more appealing alternative. 

Success Fees — A "First Cousin" to Contingent-Fee Arrangements Available Even to Defendants

Many firms will also consider offering more attractive (i.e., more affordable) hourly fee arrangements even when representing defendants in litigation by incorporating a "success fee" for certain outcomes in the course of litigation.

For example, a firm may agree to a "fixed-fee" arrangement for handling a defense case, but providing, for example, that the law firm will be entitled to, say, $250,000 as a "success fee" for a summary judgment win or $500,000 for a trial victory. This gives the law firm "skin in the game" while benefiting the client by having a "cap" on its total fee exposure.

Planning Ahead Increases the Potential for a Successful Contingent-Fee Engagement

Careful vetting of potential cases upfront is key to having a successful contingent-fee engagement. And there are other measures on the front end of any contingent-fee case that can make the difference between a happy outcome and a bad experience.

Keep Expectations Realistic

Discussing expectations upfront and on an ongoing basis is an important way to avoid disappointment on the client side in contingent-fee matters, especially those with any potential for great upside. Also, well-managed expectations will help prevent a client from walking away from a settlement that is truly a win, only because it is not the proverbial home run.

Manage Contingent-Fee Cases Like Any Other Case

A surefire way for a law firm to turn a contingent-fee case into a problem child is by ignoring basic principles of sound case management — that time must be recorded accurately and promptly, that work must be performed efficiently, and that the client should always be timely informed. Firms that do not have significant and frequent contingent-fee litigation often fail to do these things.

Avoid Expensive Shortcuts

As a general rule, almost any lawsuit's value can be diminished by making the wrong choices about where to invest resources. This can mean everything from scrimping on the budget for expert witnesses to conducting a presuit trade secret theft investigation in-house instead of with the help of an experienced third-party forensic firm.

This is not to disregard the importance of careful spending; rather, it is to underscore that a cost-benefit analysis must be made at each step. The client and law firm will work best together if they share a firm common understanding of the process by which investments in the case are decided.

Conclusion

In the current economic climate, when the legal departments of even major corporations have been forced to tighten their belts, tough decisions are being made every day about which cases merit pursuit through litigation. Now more than ever, creative fee arrangements with outside counsel are imperative. In some of those cases, a contingent-fee arrangement — whether pure or hybrid — may be the answer. As with any case, doing the right work upfront can make all the difference in the outcome.



Tommy Jacks and David Morris are of counsel, and David Hoffman is a principal, at Fish & Richardson PC.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

For a reprint of this article, please contact reprints@law360.com.

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