Practical Insights for Business Owners
Client Q&A: I just got cheated out of a lot of money, but I hear that big New York law firms charge as much as $1,000 an hour. There is no way I can pay that! What can I do?
I just got cheated out of a lot of money, but I hear that big New York law firms charge as much as $1,000 an hour. There is no way I can pay that! What can I do?
It is a common misconception that attorneys will only agree to take on matters where they are compensated at an hourly rate, an arrangement that can dissuade potential clients from seeking professional help if they don’t have the funds to pay for it. Today, there are many alternatives to the traditional hourly-fee structure. While many people are familiar with contingent-fee arrangements, that is by no means the only alternative to hourly fees. And regardless of the fee arrangement, there are ways for potential plaintiffs to get third-party litigation financing to pay for litigation costs along the way.
Alternative Fee Arrangements
The traditional alternative to hourly fees is a contingent fee, whereby the attorneys take a percentage of any recovery from the litigation (traditionally, one-third of the recovery, but the attorney’s share may be higher or lower), but receive no fees if there is no recovery. After negotiating the attorney's share, a client and lawyer in a contingent-fee arrangement must reach a separate understanding about who initially pays the costs associated with prosecuting a case (filing and service costs, mailing and copying charges, court reporter fees, expert costs, etc.) and whether the lawyer's share comes out of the gross recovery (i.e., without regard to litigation costs) or the net recovery (i.e., after deducting such costs from the recovery). These details, often overlooked, can make a significant difference at the end of a case.
Another way to structure the lawyer's engagement is a flat-fee arrangement. This can be as simple as negotiating a single fee to cover all aspects of a lawsuit, or it can be more nuanced, such as by setting tiered fees to specific stages of litigation (i.e., separately-negotiated flat fees for drafting and filing a complaint, completing discovery, completing summary judgment, trial, and appeals).
A third way to structure the lawyer's engagement is to cap the hourly fees. This arrangement too can be structured to cover the entire case (e.g., client will pay hourly rates but no more than $100,000 for the case) or by stages (e.g., client will pay hourly rates but no more than $25,000 to draft a complaint, then no more than $50,000 to complete discovery, and so on). When dealing with flat or capped fees, as is the case with contingent fees, the lawyer and client must reach a separate understanding regarding who pays litigation costs.
Elements of the foregoing arrangements can also be combined into hybrid-fee arrangements. For example, the client and attorney can combine hourly and contingency fees, such as where an attorney takes a lower hourly rate in return for a percentage of the recovery. Or the attorney can receive a bonus payment (computed either as a flat fee or as a percentage of the recovery) if the recovery is above a certain threshold.
In short, there are myriad ways to structure engagements beyond the traditional hourly-fee model, and clients and attorneys must be both creative and careful to ensure that each side is protected—and their incentives are aligned—to the extent possible. With respect to incentives, bear in mind that when an attorney's compensation does not correlate directly with the amount of time invested in a matter, it can lead some attorneys to invest less time on your matter then they otherwise might on an hourly-fee arrangement. Your attorney is your fiduciary, and therefore has a duty to put your interests first. But incentives still matter, and you should keep them in mind when deciding among compensation models.
Also bear in mind that a law firm is a business just like yours. Whether a lawyer will agree to an alternative fee arrangement and what the terms of that arrangement will be depends on her assessment of whether there is a reasonable probability that she ultimately will be fairly paid for her work.
Litigation funding is another way for plaintiffs who do not have the means or will to finance their own lawsuit to unload some or all of the costs onto a third party. Litigation funding firms will assess the merits of your lawsuit, often by consulting with you and/or your attorneys, and decide whether, and how much, they wish to contribute to litigation costs.
There are a number of issues that should be considered in deciding whether to use litigation funding. First, and most important, is how much the third-party funder will contribute, on what terms, and what their share of the potential recovery will be. Any agreements should anticipate who pays what if the litigation costs exceed the parties’ estimates, as is often the case. Second, your agreement with the funder should spell out who gets to make the key litigation decisions, such as whether to settle a case, whether to make a jury demand, or what expert to use. Sophisticated litigation funders may want some say in strategic decisions, and this can lead to disputes or friction if not addressed up front. Third, some litigation funders will seek interest on the money they contribute, either in addition to or in lieu of their share of the recovery. Given that complex commercial litigation can drag on for years, potential plaintiffs must be wary of agreeing to give up both a share of their potential recovery while also incurring interest charges, as the combination of the two can swallow any potential recovery.
Our firm has a great deal of experience working on alternative fee arrangements. We would be happy to discuss your options with you if you are considering filing a lawsuit, but may not have the means to pay hourly rates. We have also worked with litigation funding firms and can discuss the pros and cons of that option with you.