In conjunction with an evaluation of the different pricing methods, you must also determine whether you want to use hourly billing, contingency fees, fixed fees, or an alternative fee structure. This article focuses on contingency pricing.
Under the contingency pricing model, the fee amount is a percentage of the value of the recovery for the client, and is dependent on the specified outcome. Contingency pricing has traditionally been used in personal injury cases where there is a reasonably good chance that the client will receive a damage award or settlement for his or her claims. However, contingency fees are not just limited to personal injury; they are used in a variety of cases, such as collections, civil rights, securities and antitrust class actions, real estate tax appeals, patent litigation, mergers and acquisitions, loan transactions, and are even used by defendants, where the attorney agrees to a percentage of the amount the defendant saves.
The amount of the contingency percentage can vary, but is often one-third of the client's recovery. However, the percentage can be adjusted upward or downward depending on a variety of factors, such as the financial state of the client, the amount of work you anticipate performing, and/or your desire to provide a competitive discount. Oftentimes, attorneys set forth two percentages in their attorney fee agreement, one for if the case settles before trial preparation, and one for if trial preparation begins, e.g. 33 1/3% pre-trial settlement and 40% for after trial prep commences. This differentiation accounts for the substantial amount of work required if the case goes to trial.
Contingency fees are commonly requested by clients who cannot afford up-front payments for legal services, but can also be used to reflect a value to the client of the outcome or transaction. By taking a case on contingency, the attorney accepts the risk of not getting paid for services. Therefore, before agreeing to representation under this pricing model, you should have a substantial level of confidence that the case will result in a settlement, court award, or other desired outcome to the client. Otherwise, you may not get paid.
Review your state's rules on fee agreements and using contingency fee arrangements, as there may be specific requirements mandated. For example, under ABA Mode Rule 1.5(c), contingent fees are allowed (except in enumerated cases under subsection (d)), but must follow these procedures:
- The agreement must:
- Be in writing
- Signed by the client
- State the method for determining the fee, including how it accrues at different stages of the case
- Clarify whether expenses are deducted before or after the contingent fee is calculated
- Explain to client which expenses the client must pay, even if they lose the case
- At the end of the case, the attorney must provide a written explanation of the outcome, and method of determining the amount due to the client.
The ABA has also indicated that a contingent fee can be proper even if the client can afford to pay on another basis, and even if liability is clear and some recovery is expected. The same opinion confirmed that it can be appropriate to utilize a sliding scale based on how far the attorney must prosecute the case, or based on higher amounts obtained or amounts saved the client. The overarching concern is that the fee is reasonable under the circumstances and the client has been informed of alternative billing arrangements and their implications.
There may also be a cap on the percentage that an attorney is allowed to charge, so check your state rules.
When Contingency Fees Are Not Allowed
State rules may prohibit the use of contingency fees in certain circumstances. Under ABA Model Rule 1.5(d), contingency fees are not allowed for the following cases:
- Divorce cases in which the fee is contingent on the securing of a divorce or the amount of alimoney, support, or property settlement to be obtained. (But they can be used for post-judgment recovery actions for the balance of support, alimony, or other financial order)
- Criminal cases
This model does have drawbacks, such as uneven cash flow, risk of no return, and potential conflicts of interest between the client and attorney as to when to settle the case. It is a system that is not without controversy, as critics claim attorneys are overcompensated, but proponents laud the increased access to the court system by those who could not otherwise do so. With dissatisfaction rising in traditional hourly billing model, it is perhaps not a surprise that contingency fee arrangements remain an important pricing tool.