5 Tips For Determining Whether Your Contingency Fee is Reasonable

Wolfe Team
Comments Off on 5 Tips For Determining Whether Your Contingency Fee is Reasonable


by Willie Peacock of the Law Office of William C. Peacock

Contingency fees. You know what I, as a Family Law attorney, like about contingency fees? That I never have to deal with them – at all. You see, most states and the ABA Model Rules prohibit the use of contingency in most Family Law cases and in all criminal law cases. If you practice either of these fields, you might be better off skipping this article (and checking out this handy post on flat fees instead!).

For the rest of you, especially you personal injury and worker’s compensation warriors, you love contingent compensation. It allows you to get paid (because many slip-and-fallers don’t have money for an hourly rate retainer). Also, with risk comes reward: you may end up with a dud of a case that pays nothing, or you may end up with 40 percent of a multi-million dollar verdict — the latter would take an unfathomable amount of billable hours to reach the same payout. For those who can stomach the risk, a contingency-based practice can be extremely lucrative and allows them to serve clients that otherwise couldn’t afford their services.

If you’re new to the game (welcome, shingle-hangers!), haven’t updated your client agreements in a while and want a refresher, or simply are trying to figure out what in the heck a reverse contingent fee agreement is, grab a cup of coffee (or six) and read on:

TL;DR in 5 Steps

  1. Ask mentors and colleagues what they charge.
  2. Double-check their fees or any sample agreements that you’re using against your state’s latest updated requirements for a contingency fee agreement.
  3. Weigh the fee agreement for reasonableness using your state’s test (typically a variant of the ABA’s eight-factor test from the Model Rules).
  4. Give extra attention to non-standard contingency fee agreements, such as hybrid or reverse contingency fee agreements.
  5. Get informed consent from your client, and if required, let them know that the fee is negotiable and not set by law.

1. Ask Your Mentors and Peers

Normally, my advice on any legal question is this: start with the statute or rule book.

Of course, even if you do read the rules, you probably still won’t come away with a clear answer to, “What is reasonable?” Most of the rules don’t have a solid number – it’s just a bunch of factors like riskiness of the case, amount of time it will take away from other cases, etc.

Where do you start? Start by asking mentors and colleagues. Yes, the “what’s your hourly rate?” and “what are your contingency fee percentage?” questions are just about as tacky as asking someone their age or if they are pregnant, but you’re a lawyer, damn it, and you need to get used to making requests. Besides, if that person really is your mentor or your trusted colleague, they almost certainly won’t mind.

2. Check Your State’s Rules (Obviously)

Take your mentor or colleague’s suggestion for a contingency fee and check it against the rules.

This may seem obvious. It should be obvious. But we’ve all met those lawyers who never consult a statute, a case, or the ethics rules and instead just download template forms off of the Internet. Plus, rules change.

For (an admittedly obscure) example: California’s Business and Professions Code § 6147, which sets forth statutory requirements for a contingency fee agreement, used to apply to plaintiffs and litigation matters only – not to transactional cases or defendants (the reverse contingency fee discussed below). The switch tripped up an attorney in Arnall  v. Superior Ct. (Liker) (2010) 190 Cal. App.4th 360, whose contingency fee agreement in a transactional matter failed to comply with the statutory requirements.

For another example: Florida. I tried to understand their Joyce-ian Rule 4-1.5 on reasonable fees and contingency fees, but then realized that (a) I don’t live in Florida, (b) most of you don’t either, and (c) the rules stretch onward for 22 pages (including sample forms). But if you do live in Florida, that’s twenty-two pages of ethical traps that you could fall into if you fail to simply check your state rules before you practice.

3. Weigh More Factors Than a Sandra Day O’Connor Constitutional Test

Okay, you have a percentage that you borrowed from your mentor. And you’ve got your state’s rules handy. What’s next? It’s time for the “only lawyers could make things this complicated” weighing-of-factors test! You’ll want to make sure you comply with the requirements for a contingency agreement and any state-required tests for a reasonable fee generally.

Florida, to return to that painful example, has eight distinct factors for weighing the reasonableness of a fee. And six more for weighing the reasonableness of a cost that you pass on to a client. Plus, there are a separate set of rules for contingency fees: the rules not only set forth obvious requirements (in writing) but also set forth a schedule of what is reasonable absent court approval, with breakdowns by amount and by when the case is resolved (pre-answer, post-answer, when the defendant admits liability, when the case is appealed, etc.). And there’s a waivable element of the Florida Constitution that caps contingencies in medical malpractice cases.

Conversely, ABA Model Rule 1.5 on Fees has eight factors for determining the reasonableness of fees generally, and a few special requirements for contingency fees, and that’s pretty much it – no 22-page odyssey to find the reasonable fee there.

4. Scrutinize the Odd Ones (Hybrids and Reverse Contingency Fees)

You’re not sick of contingency fees yet, are you? Because we still have to deal with hybrid fee arrangements and reverse contingency fees.

Hybrid Fee Agreements

A hybrid fee arrangement typically includes both (1) a fixed (often hourly) rate and (2) a fee based on a favorable outcome. In the aforementioned lawyer-fail California case of Arnall, the court, in reaching its holding that hybrid agreements had to comply with rules for contingency agreements, stated:

The term “contingency fee contract” is ordinarily understood to encompass any arrangement that ties the attorney’s fee to successful performance, including those which incorporate a noncontingent fee based on a fixed rate of payment. (Arnall, at 373)

In short: hybrid agreements are contingency agreements and need to meet the same state-prescribed requirements, no matter how small the contingent “bonus” may be. (Arnall, in fact, dealt with bonuses of 1 and 2 percent across two separate agreements.)

Reverse Contingent Agreements

Reverse contingency agreements are based on how much loss is avoided by the client. For example, picture a defendant that is sued for 2.7 million dollars but his lawyer negotiates a settlement for only $100,000. That’s a huge win for the defense and a reverse contingent fee would give the defense lawyer a cut of the savings of $2.6 million.

The problems are plentiful with these kinds of arrangements. For one, plaintiffs are nuts. They ask for insane amounts because hope springs eternal in the plaintiff’s lawyer’s breast. In the above example, the defendant might not have actually saved $2.6 million if we are talking about the actual value of the case – a “real” judgment might have only been worth a few hundred thousand dollars.

Do you see the problem? Trying to figure out what is “reasonable” in such a case is inordinately difficult. That being said, reverse contingent fees are not outright impossible (at least under the ABA rules – your state may vary):  ABA Formal Opinion 93-373 allows these odd fees so long as “the amount saved is reasonably determinable, the fee is reasonable in amount under the circumstances, and the client’s agreement to the fee arrangement is fully informed.”

5. Will the Client Pay It? (Get Informed Consent)

When it all comes down to it, the real question is this: will the client pay it without complaining to the state bar? That may sound a bit cynical, but assuming that you have explained the risk inherent in the case, the particular difficulties in securing a victory, the amounts at stake, etc., getting informed consent for contingency fees shouldn’t be too big of an issue and should insulate you from later complaints about your “unreasonable” fee.

After all, there is a reason why many states require such informed consent, and more specifically, a statement that “the fee is not set by law but is negotiable between attorney and client” – these safeguards protect the client from thinking that the “standard 60% contingency” is required by law and they protect attorneys from having to defend their fee agreements in front of ethics boards.