Day on Torts
One of the significant problems with running a plaintiff’s practice is managing cash flow. Any fees earned are usually contingent fees, and cases are not always resolved in such a way and a such a time to meet professional and personal financial obligations.
There are at least four different ways to address this issue. First, you can visit your friendly banker and arrange a line of credit that you dip into went you need to meet payroll, significant expert expenses, etc. This is probably the most common way of handling the situation.
Second, you can do business with a company that provides funding for plaintiff’s lawyers. Here is an article describing what these companies do and what they charge. There are several different models out there and the interest rates for each of them are much higher than you would expect to pay a bank.
Third, you can mix an hourly practice with a contingent fee practice, using an hourly rate practice to help meet your “nut” and relying on your contingent fee practice to make additional income.
Fourth, you can have a pure contingent fee practice, and build up an appropriate pipeline of cases that will allow you to meet your obligations in due course.
And, of course, there are variations on each of the above.
There are advantages and disadvantages to each option, but our firm has chosen the model closest to option four. We do some hourly rate work – currently about 15 – 20% of our revenues – but all of the rest of our practice is pure contingent-fee based. We manage cash flow by accepting a relatively small number of cases per lawyer, carefully screening the case we do accept, and then pushing the cases forward to get them resolved as quickly as reasonably possible. We have not ever used a litigation finance company and do not have a line of credit, although I would not hesitate to use the latter if it became necessary.
Another variation of the above models of meeting cash flow needs is joint venturing a case with another firm. Most of our work comes from other lawyers. We are asked to help out when a case is in an area of the law unfamilar to the referring lawyer, when the case is more complicated than the referring lawyer has handled in the past, or when the case requires more time or money than the referring lawyer is willing or able to invest or risk. We typically pay all of the expenses of the case; such an arrangement allows the referring lawyer to share in the fee earned in the case while avoiding the financial risk of it (Tennessee’s ethics rules permit a division of fees so long as all attorneys involved remain reponsible for the case and the division is disclosed to the client).
The bottom line is this: it is important that you manage your practice in such a way to meet your professional and personal financial needs. That will require you to make some difficult choices, not only about your case selection but also about your lifestyle. For example, you must learn to keep your personal financial spending in check. When you have a good year don’t buy a Rolex or lease a Mercedes; instead, pay down your mortgage or sock away money for your kid’s education. Build up a financial cushion so that you can afford to accept contingent fee cases and work on them with the same zeal and consistency that you work an hourly rate case for your best client.
I concede that I am a fiscally conservative plaintiff’s lawyer. I take risks for a living, but they tend to be calculated risks. One guiding principle for me: I only take cases that I can afford to lose. Once you start taking cases you can’t afford to lose, there is a substantial incentive to settle them too cheap.