Why do you use Contingency Fees?

Every person who wants to hire an attorney should know that the amount and method of the attorney’s payment is negotiable. Attorneys may charge for their work based on an hourly rate, a flat fee for the service provided, or through a contingent-fee agreement. There are also many variations of these methods and the attorneys’ fee arrangement is limited only by creativity and negotiation.

Why does McClanahan • Myers • Espey prefer contingent-fee arrangements?

We prefer the contingent-fee arrangement because it is the model of efficiency. The arrangement aligns—perfectly—the interests of the client and attorney and effectively makes them business partners in the litigation. Both have the incentive to keep expenses as low as possible, resolve the matter quickly, and recover as much as possible.

The attorney provides the necessary labor, and often advances the case expenses, in a contingent-fee arrangement. He must believe that the case is worth pursuing before he invests his time and money, without regard to whether the matter is a commercial arbitration, intellectual property dispute, class action, or simple personal injury matter. He has no incentive to conduct wasteful discovery, use unnecessary experts, or drive-up needless litigation costs. He has every incentive to be efficient and, most importantly, win the case. In our opinion, a contingent-fee arrangement is the most efficient method of compensating the attorney for the result obtained.

How does the client benefit from using a contingent-fee arrangement?

Under McClanahan • Myers • Espey’s typical contingent-fee agreement, the “contingency” is usually the recovery of money, or something of value, for the client. If that contingency does not occur, the client owes the firm nothing for its effort. The obvious benefit to the client is that it does not have to incur an out-of-pocket expense for attorneys’ fees. This may be particularly valuable to clients who do not have the ability or desire to pay attorneys by the hour to advance their case. The arrangement also benefits the client by effectively spreading the risk of litigation. An hourly-rate payment agreement requires the client to assume all of the risk because the attorneys’ fees are a sunk cost. But under a contingent-fee arrangement, the attorney shares that risk and is only paid a fee if he wins the case or obtains a settlement. The Texas Supreme Court recently described the benefits of contingent-fee agreements when it wrote:

This risk-sharing feature creates an incentive for lawyers to work diligently and obtain the best results possible. A closely related benefit is the contingent fee’s tendency to reduce frivolous litigation by discouraging attorneys from presenting claims that have negative value or otherwise lack merit.

Finally, the contingent-fee arrangement ensures that the attorney believes in the case and will do the work necessary to obtain a positive result. Faith in the case and the desire to fight for the client may not always be present when attorneys are guaranteed payment—without regard to the success or outcome of the case.

How does a contingent-fee agreement work?

Contingent-fee agreements typically state that the attorney is entitled to a fee when a certain “contingency” is met. That contingency is usually the recovery of money for the client. But contingencies may vary based on the circumstances of the case and could include, for example, obtaining a license agreement for a patent holder, the sale of a business during litigation, or obtaining a jury verdict for a defendant that is far less than the plaintiff’s demand. Typically, once the contingency occurs, case expenses are first subtracted from the recovery and the remainder is divided between the client and attorney based on negotiated percentages. So, assuming a $100 settlement, $10 in case expenses, and a contingent fee of 33%, the client’s portion would be $60. The $10 of case expenses are first subtracted from the $100 recovery, leaving $90 to be divided between the client and attorney. With a 33% contingent-fee, the attorney would be entitled to one-third of the $90 for his work and the client would be entitled to the other two-thirds.