Alternative Fees (Part 19): Structuring contingent fees

In contingency arrangements, fees depend on success.  Of course, this approach has long been used by plaintiffs’ lawyers, but it is now becoming more common for the defense.

For example, Duane Morris billed on a contingency basis when it defended Eli Lilly in a $1.4 billion whistle blower suit over allegations of improper marketing of an anti-psychotic drug.  An online account of that suit noted that:

For at least the last decade, [Duane Morris] has focused about 4 to 5 percent of its billable time on contingency fee or other matters with alternative billing structures. And throughout that time it has cultivated a process for assessing risk and potential rewards.  The firm will only take large commercial cases with a minimum fee of $1 million. There must be a 75 percent probability of success as determined by the firm's attorneys and contingent fee committee, and an opportunity to get three times the firm's recorded time.

When structuring contingent fees, some prefer very simple approaches, as described in Part 11 of this series.

For example, Bartlit Beck bills a substantial portion of its fee at the end of each litigation.  Depending on how satisfied they were with the result, clients may choose to pay this remainder, or a larger amount, or a smaller one,  or nothing at all.  Similarly, the Valorem Law Group includes a “Value Adjustment Line” on every monthly invoice.  Clients can add or subtract whatever they think is fair to reflect the value they have received.  Each client bases the fee on results and satisfaction, and is the one and only decision maker.

At the other extreme, some clients have developed complex models to mathematically tie rewards to success and results, notably FMC Technologies’ Alliance Counsel Engagement System (ACES).  As described in an article in the May 2008 issue of ACC Docket, alternative fees guru Jeffrey Carr “has increasingly applied the ACES model to all outside legal matters [at FMC Technologies] since... 2001.”  In one example:

The company withholds a portion of the fees incurred by the law firm and at the end of a predetermined period or the conclusion of the matter, the company conducts a performance appraisal of the work done by the law firm....The law firm is rated from one to five with five being the highest score on a number of predetermined criteria. If the law firm scores ‘average,’ or a three, then the company pays the withheld amounts. If the law firm performs better than average, then the law firm receives a corresponding premium on the amount withheld. If the law firm scores lower than a three on the performance evaluation, then it receives a reduced amount on the amount withheld.

The article even includes tables showing how the math worked for a number of matters handled by Littler Mendelson.  One table shows their ratings on six scales from an actual matter: understood goals, expertise, efficiency, responsiveness, predictive accuracy, effectiveness.  It also shows how those numbers were used to calculate a 1.67% premium on the final fee for that matter.  The article goes on to explain that:

Littler Mendelson and FMC Technologies have used this basic ACES concept in three working relationships. These include general employment and benefits advice under a retainer arrangement; project work such as union campaigns, OFCCP audits, or purchase and sale matters; and employment law litigation. The general ACES concept differs in each relationship but is based on the same general model.

Which is better for contingent arrangements, the simplicity of the value line adjustment or ACES’ detailed mathematical precision?  Personally, I prefer the simplicity of “less is more.”  But it doesn’t matter what I think, it matters what clients think.  Large firms must be prepared to offer both simple solutions and complex ones to meet a variety of needs.  The client is always right.

For a summary of this series, see the free LegalBizDev Guide to Alternative Fees, in the Alternative Fees section of our web page.  A substantially revised edition of that Guide will be released on July 29 in connection with our West LegalEdcenter webcast on Alternative Billing: How to Implement Sustainable Programs for the Long Run.