Thinking About Contingent Fees

Maxwell Kennerly has written  an excellent post titled "Contingent Fee Business Lawyers as Venture Capitalists" at his Litigation and Trial blog.

An excerpt:

Day in and day out, the primary thing a contingent fee law firm does is spend lots of money. In addition to all the normal costs of a business (rent, staff, etc.), you have to pay your attorneys salaries which are competitive in the market, even against hourly billing firms, and you have to dump loads of money and time into cases for experts, motions, discovery, trials, appeals and negotiations, none of which earn you a dime until the very end.

So I’d say it’s no different from Brad’s or Fred’s ventures: [plaintiff’s lawyers] have as strong an incentive against taking frivolous or vexatious claims as they have against investing in unprofitable businesses. The last thing I want to do is spend years of my life and five, six or seven-figures pursuing a case that returns nothing. Like a venture capital fund, our contingent fee law firm turns down far more cases than it accepts.

Of course, Maxwell’s thoughts apply to any type of contingent fee litigation.  Every case is an investment, and every good investor engages in due diligence before investing.  Part of that due diligence requires not only analysis of risk but also an understanding of costs.   In other words, you should analyze what it will cost you in time and money if you decide to make an investment in a potential case, and you should also endeavor to understand the likelihood of winning and the likely recovery range.

Any VC fund that does not undertake that analysis quickly goes broke.  Any lawyer asked to do contingent fee work who does not undertake that analysis will do the same.

Please don’t give me that worn out "but that is treating law as a business" line.  Let me let you in on a little secret – your landlord, suppliers, and bank think you are running a business.  They want to be paid.  End of story.

I am not saying that you should not do pro bono work.  I am not saying that you should not take cases that are not profitable simply because you believe in the cause or want to help the particular client.  I am saying that you should take those cases consciously, the same way you would make a donation to your church or other organization.   Why?  Because you are making a donation – you are giving away or selling at reduced value something that costs you money to provide.  Once again, that does not mean you should not do it.  It means you should be aware of what you are doing.

Stated differently, it is fine, indeed it is admirable, to  tell yourself "I know that this case is not a money maker for me but I am going to take it because (fill in the blank)."  If you can articulate a reason that is consistent with your values and can afford to make the necessary commitment, go for it.  If not, taking that case will lead to not only financial loss but resentment.  Resentment impacts your productivity and leads to unhappy clients, bar complaints, and more.

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