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You are a representative who has been terminated even though your written contract states that you cannot be fired until a certain condition precedent has occurred. Or you have improved or created a product or process, and your principal or your customer is marketing it as their own without providing you with any credit. Your friends and colleagues tell you that you should hire a lawyer and do something about it — and MANA has several excellent lawyers on its roster from which to choose — but you fear that any litigation would be too expensive to pursue. So do you just chalk it up as another “hard knock” in life?

Here is a topic that is not discussed openly very often — and certainly not voluntarily by many lawyers — legal fees. You may not realize that there are many different ways in which law firms are being paid for their services, which may present opportunities for you.

First, you should understand a little bit about law firm economics. Here is an inside peek from a managing partner of a 120-year-old law firm. Like your business, law firms have monthly fixed expenses; i.e., rent, salaries, insurance, etc. They also have other expenses like continuing legal education, computer infrastructure and business development costs. A law firm has to make a profit in order to survive. And you, as a client, want your law firm to make a profit, so that it can attract and pay the best talent and perform at its very best for you. This is not an earth-shattering revelation.

But the following may be news to you. Although the norm today is for law firms to bill by the hour for all time spent on a case, this was not always the practice. Before the 1970s, most law firms billed their clients for the value provided, either as a monthly or yearly retainer or flat fee for blocks of legal work. When auditors became involved in law firm billing, the result was the beginning of the billable hour — where lawyers could write down every task that they performed for a client at any moment, day or night, and bill not for the value or actual work, but for the amount of time that each task took. And hourly rates can range from a couple of hundred dollars to close to $1,000 per hour. (Yes, there are some who charge this much.) With the advent of the billable hour, law firms became risk averse because now they could include their profit in every hour of billing. And only those clients with significant resources would be a worthwhile risk for a law firm.

Contingency Fees

Of course, at the opposite end of the spectrum were personal injury lawyers for plaintiffs, who risked it all on their bet for a recovery large enough that their share, or “contingent fee,” could provide them with a profit. If they took on a small case, or one on which they did not prevail, they would suffer all of the loss. Like insurance underwriters, a good contingent fee lawyer would manage their risks, so that at the end of the day, they would be assured of turning a profit.

For the past decade or so, primarily as a result of client demand, but also due to a few forward thinkers, some law firms are re-thinking their value propositions to their clients and entering into alternative fee arrangements (“AFAs”). They are called “alternatives” because they are other than the product of the hours spent times the regular hourly rate of the lawyer.* AFAs can run the gamut of possibilities too, from a pure contingent fee to a hybrid of a flat fee, plus contingency or success bonus. A good hybrid fee arrangement is designed to share and align the risks of the law firm and client.

Here is an example of a flat fee, success bonus fee arrangement: A representative has made various sales which have earned anywhere from one hundred to two hundred thousand dollars in commission. Rather than pay the representative what has been earned, however, the principal decides to terminate the relationship and keep the commission. Given the sizeable amount of commissions, a law firm may wish to take this case on a pure contingency, but instead, it agrees to render all of the services necessary to complete the case through trial by charging a flat fee for each of the stages or facets of the litigation. It can parse the case out into four phases:

• Phase I includes everything from the factual investigation, the preparation of the complaint and handling any motions related to the complaint.
• Phase II includes all discovery, which is the formal investigation of the facts and evidence in the case, the exchange and responses to written document requests and deposition testimony.
• Phase III involves pretrial pleadings and preparation for trial.
• Phase IV is the trial.

Because the client wishes to obtain the greatest possible recovery at the earliest possible time, the lawyer agrees to accept a flat fee at the beginning of each phase and a different percentage of the recovery at each stage. To align both the client’s and lawyer’s interests and goals, the percentage is larger if the recovery is achieved before the case proceeds to the next stage. For example, the “success bonus” will be 25 percent if the recovery is obtained before Phase II begins; 20 percent if recovery is achieved before the third phase begins and 15 percent if recovery is obtained before phase IV.

There are many other AFAs offered by some law firms, and most recently, third party litigation funders have joined the market. There are a few banks and hedge funds that are working with law firms and clients and agreeing to underwrite certain suits in exchange for a share in the “winnings.” Recently, I was interviewed by First Business News on this subject. See www.firstbusinessnews.com/lawsuitinvestors5813-5.

Whatever best fits your case, an hourly fee, an AFA, or a third-party funder, there are many options to help you fund and prosecute worthwhile litigation.