Defense Contingency: Creative Cap for Legal Fees
Companies get sued. It is an unfortunate reality of doing business. Oftentimes, the biggest problem with handling a lawsuit is the attorneys’ fees -- not the claims of the opponent.
Attorneys defending companies in litigation primarily bill by the hour. Billing by the hour can create uncertainty for clients because it is impossible to know how many hours will be required to defend a lawsuit. In fact, businesses and their attorneys often underestimate the number of hours that will be required. Amid the overall uncertainty of how much the whole ordeal will cost, there are sometimes surprise monthly invoices that are much higher than other months during the same case -- making it even more difficult for a business to accurately budget.
But there are alternatives to consider.
What is a Reverse Contingency Fee?
Most people are familiar with the traditional contingency fee arrangement under which the attorneys are paid a percentage of the amount of money they collect for their client. For example, assume attorneys and their client agree to sue a company and that the attorneys will receive 35% of any money collected in the lawsuit. Under that agreement, the attorneys then secure a $100,000 judgment. After collecting the judgment, the attorneys are entitled to $35,000 and the client receives $65,000. Generally, the client must also pay any additional costs accrued (e.g. filing fees, vendor fees, etc.) either upfront or out of their $65,000.
This traditional contingency fee principle can also be reversed to apply to the fees the company defending a lawsuit must pay its attorneys. Under this reverse contingency fee arrangement, the company’s attorneys will receive a percentage of the amount of money the attorneys save the company from having to pay the opposing party. This requires the attorneys and company to agree to the percentage of savings the attorneys will be paid and to identify the value at risk in the lawsuit that will serve as the benchmark. For example, a company is sued for $100,000 and the company agrees to pay its attorneys a 35% reverse contingency fee. If the defense attorneys win the case for the company, the company will then pay its attorneys $35,000. Like a traditional contingency fee arrangement for plaintiffs, the company generally must pay the costs other than the attorneys’ fees (e.g. filing fees, vendor fees, etc.) upfront or as incurred during the lawsuit.
How is a reverse contingency fee structure valuable to businesses?
A reverse contingency fee arrangement provides a sum-certain cap on the amount of attorneys’ fees a company could end up paying to defend against a lawsuit. Under a reverse contingency fee arrangement, the client will not pay more than the set percentage of the agreed upon value-at-risk benchmark for attorneys’ fees. In addition, the reverse contingency fee eliminates the month-to-month uncertainty associated with billable hour arrangements. A company can avoid the risk of an unexpectedly high bill. This gives companies the ability to budget for the expense of a lawsuit. Moreover, the attorneys’ fees are tied directly to the attorneys’ performance and the merits of the case. As such, the company will be paying for the value actually provided by the attorneys.
Although incurring a large amount of attorneys’ fees all at once can seem more burdensome than the uncertainty of billable hour arrangements, reverse contingency arrangements provide the flexibility to avoid a large one-time payment. For example, a company may be able to secure financing or enter into a payment plan with their attorneys. In fact, some attorneys may require that potential fees (or a portion of the fees) be paid into escrow or that some type of security be obtained (e.g., letter of credit) prior to finalizing the engagement of the attorneys. Regardless of the structure, the associated costs, payment plans, financing, and other related details can be worked out upfront to ensure the structure aligns with the company’s goals, provides certainty, and matches the company’s financial capabilities.
Although the billable hour arrangement is the best option in certain circumstances, clients should explore other fee structures when engaging a lawyer. Considering more creative fee structures can help companies protect their business goals when unexpected litigation arises.
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Disclaimer: This post is for general information purposes only and is not intended to be and should not be taken as legal advice.