Using Your Fee Arrangement to Lower Litigation Costs

Contingency Is Not a Boogeyman ' It Is Capitalism

Corporate counsel have generally shunned contingency because it conjures up images of hiring plaintiffs lawyers ' every general counsel's boogeyman. Yet some of the finest complex litigators, many of whom have left large firms, work on a contingent basis whenever they can. Why? Because they are confident in their skills, both in initial case analysis and in bringing home the bacon once they have accepted a case. Isn't this just the sort of lawyers you want on your side ' ones who are so confident in what they do that they are willing to bet their compensation on it? By excluding such lawyers from your radar screen you are excluding some of the most qualified people that you can hire.

So, get over it. General counsel should incorporate contingency into their fee arrangements with their outside counsel, be they a plaintiff or a defendant (yes, even a defense matter can and should incorporate contingency).

Fee Cap or Fixed Fee Arrangements: a Rose By Any Other Name

But first let's burst the bubble of an 'alternate' fee approach that really makes no sense, the fixed fee or fee capped arrangement. In the end a fee cap is merely a glorified budget and how often have your litigation budgets ever been met?

Think about it for a moment. You request 'competitive' fee capped bids from various large firms to handle a major litigation matter. These are the same firms that you read about every year whose profits per partner are ever increasing. How are these profits increasing, through more hours being billed, even though many of them have 'won' bidding wars on supposedly fee capped matters.?

Whatever bids you receive will necessarily have a profit built in that ensures that these firms are still making money the 'old-fashioned way' ' through billing more hours. Believe me, none of them are changing their business model for you. They are just packaging it up in a different form and hoping that they don't reach the fee cap before the litigation is over. And you'd better hope that they don't hit the ceiling too soon either. Do you really believe that they will continue working as hard as they did prior to hitting the ceiling? Something has to give ' either their profits per partner or the effort you receive thereafter. Or, even more likely, they will come with tin cup in hand, explain that there were unexpected developments and therefore they need a renegotiation on the cap. In short, fee cap arrangements aren't the answer because they don't fundamentally change the business model of your outside counsel. They are still working an hourly basis ' it is just capped ' maybe.

The Case for Contingency

Your company operates in a competitive world where those who produce the best products in the most efficient manner usually come out on top. Why shouldn't this be the case when it comes to your outside litigation counsel? Why shouldn't at least some if not all of their compensation be tied to results?

In Cases Where You Are a Plaintiff

In those situations in which your company may be a plaintiff, using a contingency fee arrangement is a no-brainer. Why a plaintiff would ever want to pay an hourly rate for a litigation matter is beyond me. If the case is sound, there should be any number of highly qualified litigation teams willing to take the matter on a contingent basis. If it is weak, what better litmus for you can there be about why you shouldn't be bringing the case if firms take a pass on the case because they don't think it is worth the risk? Why would you ever want to pay someone on an hourly basis to bring a case that firms have passed up taking on a contingent basis? But it is your money to waste if you want.

For plaintiffs' matters, there is a beautiful symmetry to contingency. Your lawyers fight tooth and nail because they want to get paid. In-house counsel's management of outside counsel in such arrangements is also far less demanding. Assuming you have hired the right firm, you can count on their doing everything necessary to maximize the recovery regardless of the strength of the case. Moreover, you go into the litigation knowing that there is a ceiling on fees. If your outside counsel get a 100% result for you they will earn a fee at a level that you have already determined was acceptable, because you will have negotiated a contingent arrangement at the beginning of the litigation that both you and your outside counsel can live with. From my own experience, having worked with large corporate clients in plaintiffs matters, most general counsel and their clients have never once looked back and regretted that my contingent fee was large because that meant that their recovery was also large.

Finally, what a beautiful thing for general counsel and their relations with the C-Suite. No monthly bills to explain to the C-Suite. No need to justify why you are pursuing the case. Moreover, when the case is ended either by way of judgment or settlement, you pay no legal fees, win lose or draw. Think about that. if you lose you don't pay anything. If you win either by way of judgment or settlement, the other side pays your fees. In fact, depending on your accounting practices the payment of these fees may never hit your balance sheet. The only question is, why haven't you been using contingent arrangements for your plaintiff cases all along?

Contingency on Defense Matters: Its Time Has Come

Many of these same attributes apply when you incorporate contingency into your defense matters. Let's look at the two situations at both extremities ' one where you are staring at a big loss because the facts and law are bad for you and the other where you are confident that you should be able to prevail early. For your tough cases, wouldn't you want to make it part of your counsel's compensation that they bring the case in as low as possible? For your strong case wouldn't you want to create an incentive for your counsel to bring a quick end to the litigation? This incentive would be something that, regardless of their best intentions, is not in their best economic interests if they are working on a pure hourly basis.

So why not create incentives for your defense counsel to produce results for you other than the fact that you might hire them the next time you have a big troubling piece of litigation? In doing so, you can also lower your ongoing out-of-pockets because defense based contingency arrangements should and normally do combine a lower hourly rate ' say 20%-50% reduction of standard hourly rates ' coupled with contingency bonuses for meeting certain result directed benchmarks.

Contingency on defense matters can also breed efficiency. Counsel who are adept at it do what is necessary to win and eliminate make work. Thus, by creating an incentive through contingency you will find that your outside counsel will be billing hours that are needed and not loading on hours that are not needed. Why? Because they want to do what is necessary to achieve the benchmarks but do it so that they earn a profit through their contingency.

These arrangements do require an upfront negotiation between in-house and outside counsel to mutually agree on what the actual exposure is to your company but what is wrong with that? Wouldn't you like to have such a discussion and concrete analysis about this upfront?

Then, after you have arrived at what are the realistic exposures you can then negotiate benchmarks that will create bonuses for your outside counsel based upon their getting results for you. Sounds different, but don't knock it until you have tried it. It is guaranteed to get you the best defense result possible ' lower out- of-pockets and ensures that if your counsel makes a large fee on your defense matter it will be due to the fact that they produced for you and not because they churned hours.

Conclusion

So you can continue on the well-worn path of hourly rate based compensation and this series is intended to help you better maintain the lid on costs in your hourly rate matters. But if you want the closest thing to a magic bullet in containing costs, incorporate contingency into your fee arrangements. If your large firm counsel is unwilling to accept such an arrangement, hire someone else who will. There are great litigation boutiques out there that will welcome the opportunity and they will outperform any counsel who doesn't have the confidence in himself to accept employment on the basis of results. You just have to decide that you are 'mad as hell' and 'not going to take this anymore.'

Next installment: Case analysis ' tools to initially evaluate a case. The development of a case plan and the execution of your plan as the case progresses.

Stewart M. Weltman, a member of this newsletter's Board of Editors, is the principal in the Chicago-based Weltman Law Firm. He focuses on assisting litigation teams. He can be reached 312-606-8756 or [email protected].

As discussed in the previous two articles in this series, having the smallest possible litigation team in place and having a person with adequate litigation experience to monitor the team effectively are two important elements for any general counsel intent on keeping litigation costs in check. This is particularly so if you insist upon working under the old paradigm of paying your outside counsel on an hourly basis.

But I am going to try to persuade you to adopt or least consider a different fee arrangement ' contingency. It is really simple: Having an economic stake in what one is doing creates an urgency, like no other, that heightens one's desire to both work efficiently and strive for the best possible result. It is precisely why employing litigation lawyers on solely an hourly basis is a flawed concept for both client and lawyer. Sure, most hourly litigation lawyers have sufficient professionalism and ego to strive to win, regardless of how they are paid. But there is an old saying within the plaintiffs' bar that, 'Defense lawyers get paid per diem, plaintiff lawyers get paid perchance.' Behind this old saw is an economic truism ' hourly lawyers get paid no matter what the result, contingent lawyers get paid only when they produce a positive result.

Moreover, when lawyers agree to accept a stake in the outcome as part of their compensation, it means that they must perform a cold evaluation of the litigation's prospects. If they accept contingency as part of their compensation you know that they have concluded that your case has sufficient merit that they are willing to tie some or all of their compensation to the case's prospects.

Contingency Is Not a Boogeyman ' It Is Capitalism

Corporate counsel have generally shunned contingency because it conjures up images of hiring plaintiffs lawyers ' every general counsel's boogeyman. Yet some of the finest complex litigators, many of whom have left large firms, work on a contingent basis whenever they can. Why? Because they are confident in their skills, both in initial case analysis and in bringing home the bacon once they have accepted a case. Isn't this just the sort of lawyers you want on your side ' ones who are so confident in what they do that they are willing to bet their compensation on it? By excluding such lawyers from your radar screen you are excluding some of the most qualified people that you can hire.

So, get over it. General counsel should incorporate contingency into their fee arrangements with their outside counsel, be they a plaintiff or a defendant (yes, even a defense matter can and should incorporate contingency).

Fee Cap or Fixed Fee Arrangements: a Rose By Any Other Name

But first let's burst the bubble of an 'alternate' fee approach that really makes no sense, the fixed fee or fee capped arrangement. In the end a fee cap is merely a glorified budget and how often have your litigation budgets ever been met?

Think about it for a moment. You request 'competitive' fee capped bids from various large firms to handle a major litigation matter. These are the same firms that you read about every year whose profits per partner are ever increasing. How are these profits increasing, through more hours being billed, even though many of them have 'won' bidding wars on supposedly fee capped matters.?

Whatever bids you receive will necessarily have a profit built in that ensures that these firms are still making money the 'old-fashioned way' ' through billing more hours. Believe me, none of them are changing their business model for you. They are just packaging it up in a different form and hoping that they don't reach the fee cap before the litigation is over. And you'd better hope that they don't hit the ceiling too soon either. Do you really believe that they will continue working as hard as they did prior to hitting the ceiling? Something has to give ' either their profits per partner or the effort you receive thereafter. Or, even more likely, they will come with tin cup in hand, explain that there were unexpected developments and therefore they need a renegotiation on the cap. In short, fee cap arrangements aren't the answer because they don't fundamentally change the business model of your outside counsel. They are still working an hourly basis ' it is just capped ' maybe.

The Case for Contingency

Your company operates in a competitive world where those who produce the best products in the most efficient manner usually come out on top. Why shouldn't this be the case when it comes to your outside litigation counsel? Why shouldn't at least some if not all of their compensation be tied to results?

In Cases Where You Are a Plaintiff

In those situations in which your company may be a plaintiff, using a contingency fee arrangement is a no-brainer. Why a plaintiff would ever want to pay an hourly rate for a litigation matter is beyond me. If the case is sound, there should be any number of highly qualified litigation teams willing to take the matter on a contingent basis. If it is weak, what better litmus for you can there be about why you shouldn't be bringing the case if firms take a pass on the case because they don't think it is worth the risk? Why would you ever want to pay someone on an hourly basis to bring a case that firms have passed up taking on a contingent basis? But it is your money to waste if you want.

For plaintiffs' matters, there is a beautiful symmetry to contingency. Your lawyers fight tooth and nail because they want to get paid. In-house counsel's management of outside counsel in such arrangements is also far less demanding. Assuming you have hired the right firm, you can count on their doing everything necessary to maximize the recovery regardless of the strength of the case. Moreover, you go into the litigation knowing that there is a ceiling on fees. If your outside counsel get a 100% result for you they will earn a fee at a level that you have already determined was acceptable, because you will have negotiated a contingent arrangement at the beginning of the litigation that both you and your outside counsel can live with. From my own experience, having worked with large corporate clients in plaintiffs matters, most general counsel and their clients have never once looked back and regretted that my contingent fee was large because that meant that their recovery was also large.

Finally, what a beautiful thing for general counsel and their relations with the C-Suite. No monthly bills to explain to the C-Suite. No need to justify why you are pursuing the case. Moreover, when the case is ended either by way of judgment or settlement, you pay no legal fees, win lose or draw. Think about that. if you lose you don't pay anything. If you win either by way of judgment or settlement, the other side pays your fees. In fact, depending on your accounting practices the payment of these fees may never hit your balance sheet. The only question is, why haven't you been using contingent arrangements for your plaintiff cases all along?

Contingency on Defense Matters: Its Time Has Come

Many of these same attributes apply when you incorporate contingency into your defense matters. Let's look at the two situations at both extremities ' one where you are staring at a big loss because the facts and law are bad for you and the other where you are confident that you should be able to prevail early. For your tough cases, wouldn't you want to make it part of your counsel's compensation that they bring the case in as low as possible? For your strong case wouldn't you want to create an incentive for your counsel to bring a quick end to the litigation? This incentive would be something that, regardless of their best intentions, is not in their best economic interests if they are working on a pure hourly basis.

So why not create incentives for your defense counsel to produce results for you other than the fact that you might hire them the next time you have a big troubling piece of litigation? In doing so, you can also lower your ongoing out-of-pockets because defense based contingency arrangements should and normally do combine a lower hourly rate ' say 20%-50% reduction of standard hourly rates ' coupled with contingency bonuses for meeting certain result directed benchmarks.

Contingency on defense matters can also breed efficiency. Counsel who are adept at it do what is necessary to win and eliminate make work. Thus, by creating an incentive through contingency you will find that your outside counsel will be billing hours that are needed and not loading on hours that are not needed. Why? Because they want to do what is necessary to achieve the benchmarks but do it so that they earn a profit through their contingency.

These arrangements do require an upfront negotiation between in-house and outside counsel to mutually agree on what the actual exposure is to your company but what is wrong with that? Wouldn't you like to have such a discussion and concrete analysis about this upfront?

Then, after you have arrived at what are the realistic exposures you can then negotiate benchmarks that will create bonuses for your outside counsel based upon their getting results for you. Sounds different, but don't knock it until you have tried it. It is guaranteed to get you the best defense result possible ' lower out- of-pockets and ensures that if your counsel makes a large fee on your defense matter it will be due to the fact that they produced for you and not because they churned hours.

Conclusion

So you can continue on the well-worn path of hourly rate based compensation and this series is intended to help you better maintain the lid on costs in your hourly rate matters. But if you want the closest thing to a magic bullet in containing costs, incorporate contingency into your fee arrangements. If your large firm counsel is unwilling to accept such an arrangement, hire someone else who will. There are great litigation boutiques out there that will welcome the opportunity and they will outperform any counsel who doesn't have the confidence in himself to accept employment on the basis of results. You just have to decide that you are 'mad as hell' and 'not going to take this anymore.'

Next installment: Case analysis ' tools to initially evaluate a case. The development of a case plan and the execution of your plan as the case progresses.

Stewart M. Weltman, a member of this newsletter's Board of Editors, is the principal in the Chicago-based Weltman Law Firm. He focuses on assisting litigation teams. He can be reached 312-606-8756 or [email protected].