We’re all familiar with law firm advertising that says, “You pay nothing until we win!!” This statement is a way of letting you know that the attorney you’re considering charges contingent fees. The “contingency” in a contingency fee is that you, mostly, don’t pay any fees unless your attorney wins your case or settles it in your favor. Essentially, for a share of the award you eventually receive in your lawsuit, the attorney takes the case risking that, if you do not win the case, the attorney will not get paid.
Those in favor of contingency fees believe that they may make it easier for less well-to-do clients to obtain access to the legal process. They also argue that the contingency of the fee spurs the attorney to zealous advocacy for the client’s cause and helps clients shift or share the risk of losing the case with the attorney.
When Can I Use a Contingency Fee?
Contingency fees used to be prohibited since they looked like someone (that is, the attorney) was buying a speculative share in a lawsuit. This practice was called champerty and was strictly forbidden.
On the other hand, poor people had a really hard time going to court since they would have to have money in hand to pay a lawyer, and if they lost, they might end up paying everyone’s attorney fees. In the end, the law and the ethical canons permit the use of contingency fees in some but not all cases and usually impose requirements on their use.
1. Cases Where Contingency Fees Are Used
Law firms most commonly use contingency fees in cases where, if victorious, the plaintiff will receive money damages.
These cases include:
- Personal injuries – Personal injuries are the classic cases where an injury can result in a potentially very large settlement. However, with insurance companies and, often, powerful corporate entities on the defense side, individual plaintiffs might experience serious difficulties getting justice without the contingency fee.
- Professional malpractice – Professional malpractice presents the same issues as any personal injury but also requires what is usually reluctant expert testimony. Lining up all the pieces against the powerful insurance companies and hospital corporations can bar the courthouse door without a contingent fee.
- Sexual harassment – These claims begin by demonstrating the unequal power of the victim and the harasser. Without contingent fees, justice could be very difficult to find.
- Employment discrimination & wage disputes – As with sexual harassment, there is a clear power advantage for the employer in these cases. Contingent fees make fighting the employer – much easier for what are often low-paid hourly workers.
- Bankruptcy – Some states do permit contingent fees in bankruptcy, but generally, there is an installment plan for the balance of the fees if a law firm establishes a payment plan. Contingency fees are not common in bankruptcy and may require approval by the court.
- Class action lawsuits – Class actions are usually lawsuits with a great many potential plaintiffs who have suffered a common but relatively small injury. This fact pattern is important because attorneys would generally be unlikely to take on a case where their fee would be a percentage of a very small number. However, if there are a great many of those small common injuries, the total pot of money available for the contingency fee to be charged against can change that analysis drastically. For example, one plaintiff may only be likely to see a $5.00 reward, but a million $5.00 plaintiffs lead to a $5 million award of which the attorney will receive a percentage. The case now becomes very much worthwhile to the attorney for a contingency fee.
- Debt collections – Debt collection is often an unpleasant effort governed by a large body of complex and detailed state and federal laws and regulations. It tends to be handled by specialists who enter into retainer agreements with large corporations under which they receive a flat percentage of any amounts they collect.
2. Cases Where Contingency Fees Are Prohibited
The Model Rules of Ethics of the American Bar Association prohibit contingency fees for domestic relations cases, like divorces, and for representing a criminal defendant. Many states have adopted this prohibition under their state law and regulation governing legal practice.
This prohibition means if you’re getting a divorce, you will have to pay for it upfront, although it is possible to ask for fees to be awarded to you when the divorce is final. The prohibition avoids the appearance of encouraging crime or divorce. This rule also means that your criminal defense lawyer is not distracted by potential financial gain in handling your case. Some states also prohibit contingency fees in immigration and bankruptcy cases and in drafting documents like wills and trusts that will eventually result in the payment of sums of money.
In addition, even if not technically illegal, it could also be unethical for an attorney to take a case that is an obvious win on a contingency basis. Instead, the attorney, in that case, should evaluate the work needed to complete the matter and quote the client a reasonable fee for the work.
3. English v. American Rule and Champerty
Those who oppose the use of contingency fees liken it to the old legal offense of champerty, which refers to buying a legal interest in the outcome of a lawsuit. Much of the world still views it that way, which is a large part of why U.S. plaintiffs can generally get easier access to the courthouse than in many other countries.
A similar issue is that the loser of a lawsuit in many countries will pay the legal fees and costs for both sides (the English rule). This possibility makes filing a lawsuit considerably more risky for the potential plaintiff than a plaintiff under the American rule who, even without a contingency fee, would only be liable for the costs of that plaintiff’s side of the case.
How Is a Contingency Fee Calculated?
Law firms base contingency fees on a percentage of your final award or settlement received in a lawsuit. Some states limit the amounts of contingency fee percentages that lawyers can charge.
Nonetheless, there is a wide range of permissible fees from 5 percent to 50 percent. The client may or may not be responsible for filing fees, costs of discovery, expert witness fees, and similar overhead costs regardless of the outcome. This issue will be addressed in the contingency fee agreement, as will whether the client will pay the fee “net” or “gross” of fees.
1. Net of Fees
A “net of fees” contingency fee agreement will provide that the monies from the award will pay outstanding fees, expenses, liens, and other similar costs before the attorney’s percentage is applied.
Thus, for example, in a 40 percent net contingency fee award of $100,000, with $55,000 in outstanding costs, the $55,000 would be paid first, leaving $45,000 for the attorney and the plaintiff. This arrangement would result in $18,000 to the attorney and $27,000 to the plaintiff. A net contingency fee is much more to the plaintiff’s benefit than a gross fee.
2. Gross of Fees
A “gross” contingency fee is paid from the full amount of the award before you have paid any of your expenses. These unpaid expenses can include court costs and fees, medical and hospital expenses, and any liens that another party may have imposed during the pendency of the litigation.
Thus, for example, in a 40 percent gross contingency fee, with a $100,000 award, the law firm will immediately receive $40,000. The client then pays all the expenses from the client’s share and is then left with the balance of the award. Assuming that those expenses came to $55,000, the client may see only $5,000 of that $100,000 award.
Gross contingency fee agreements are legal and mostly deemed ethical but may not be exactly fair to the client. It is critical to check out this issue before you sign a contingency fee agreement.
3. What Percentage Do You Pay When
Discuss with your attorney whether your contingency fee agreement provides different fee percentages depending on the stage of the case at which it concludes. In essence, a case that settles early on takes far fewer legal resources and work than does a case that goes to trial or appeal. Thus, you may want to try to negotiate a lower percentage fee when the case concludes with less effort.
4. What Factors Should You Consider in Whether a Fee Is Fair
When someone challenges a fee, courts will look at several factors in determining whether an attorney has charged too much for a contingency fee case. First, they will examine how much time and work the law firm put into the case, whether it presented issues they hadn’t addressed before, and how much skill the attorney needed to handle the case properly. They will also look at the impact that accepting this case might have on the attorney’s ability to obtain other work.
Courts will then examine:
- Customary fees for that kind of work in that locality
- Amount of the potential award
- Results obtained
- Any time limitations arising from the client or the facts of the case
- Any pre-existing professional relationship between the attorney and the client
What Kind of Agreement Is Required
Under the American Bar Association Model Rules of Professional Conduct for attorneys, fees must be reasonable based on the work to be performed.
Moreover, if the client is to make payment on a contingent basis, there must be a written agreement which:
- It is in writing usually a letter from the attorney or law firm.
- Signed by the client usually, you will be required to sign the letter and retain a copy for yourself.
- States the method for determining the applicable fee percentages (which may differ) in the event of
- Whether gross or net of expenses and fees that is, whether you pay all the expenses from your share or the expenses are paid before the attorney collects anything.
- Whether the client will pay anything if the client is not the prevailing party in other words, what do you have to pay even if you lose your case
- Calls for the attorney to provide a distribution sheet to the client upon conclusion of the matter Sheet will be provided to you showing precisely who received what money from the case proceeds.
Contingency Fees Can Be Useful for Both Sides
As you’ve seen, a contingency fee can be a significant benefit to the client who has a large claim but small pockets. The fee arrangement permits the sharing of the risk of loss and rewards the attorney for participating in that risk. Doing so enables the smaller client to get past the courthouse door and seek justice and compensation for the injuries done to the client.
Ask Questions Before You Sign
Nonetheless, since some attorneys may use contingency fee agreements that are written entirely or almost so in their favor (e.g., gross of fee agreements), clients must shop around when looking for a contingency fee attorney.
Some questions to ask:
- Will my fee vary depending on the stage of the litigation that it concludes?
- Is your fee percentage pretty standard for this kind of case in this area?Episodic or short-term memory or executive function loss
- How do you define a successful outcome of the case for purposes of receiving your fee?Explosiveness
- Are there fees or costs that I will have to pay even if we lose the case?
- Are there fees that I have to pay upfront before we even file?
- How much experience do you have in this kind of case?
- Will your fee be calculated before or after the payment of outstanding costs and expenses?
Make sure to ask all these questions before signing the contingency fee agreement. Also, make sure that the agreement the attorney gives you matches what he or she has been saying to you. Be very suspicious if the terms in the written agreement don’t conform to how the attorney says they handle these matters. It will be well worth your time to speak with more than one attorney about their contingency fee policies before your initial consultation.