Ban the Billable Hour:

Oliver Wendell Holmes, Jr. once quipped, “Lawyers spend a great deal of their time shoveling smoke.” This is especially true in business litigation, where letter writing campaigns turn into epic battles of sound and fury, and discovery becomes divorced from what is necessary for the case. These inefficiencies are pervasive because clients have historically paid for them. It is high time to turn off the smoke machine of business litigation, the billable hour.

People pay to receive results. A mechanic’s client expects his brakes to stop squeaking. A restaurant patron expects her steak to be medium-rare. A concert attendee expects to be entertained. With these services and products, the downside of unmet expectations is negligible. Customers can ask for their money back, exchange the item, or do nothing and temporarily experience disappointment.

But the cost of unmet expectations in litigation is difficult to swallow. So stop shouldering the entire risk. Stop agreeing to pay by the pure billable hour. That arrangement insulates lawyers – not the client – from a negative outcome and incentivizes needless litigation exercises.

When lawyers also shoulder some of the risks, clients no longer pay for shoveling smoke. Alternate fee arrangements (“AFA”) are defined in this article as fee structures besides the pure billable hour. These AFAs force outside counsel to take on the risk of litigation and to “walk a mile” in their clients’ shoes. Making your lawyers put skin in the game changes the dynamic for both the attorney and the client.

This article examines a few potential AFAs for business disputes.

Contingency and Reverse Contingency Fees

The most commonly known alternate fee structure is the contingency fee or partial contingency fee. This is when the attorney receives a fixed or scaled percentage of any monetary recovery. While contingency fees are common to the plaintiffs’ bar, reverse contingency fees are gaining traction with the defense side. This is when the winning attorneys receive a fixed amount they “saved” the client. The key to a reverse contingency fee is correctly valuing the case.

Experienced trial attorneys, with the assistance of a valuation expert, will have insight into damages likely to be awarded by a jury. A reverse contingency fee AFA only works if a matter is properly valued.

The benefit of contingency and reverse contingency fees are that the attorney has a stake in the outcome. The downside to contingency and reverse contingency agreements is that companies rarely see cases through to their conclusion, may switch counsel, or may settle for something other than money or for an amount far less than outside counsel thinks is wise. For these reasons, outside counsel may have trepidations about a “pure” contingency in business litigation.

Hybrid Fees

“Hybrid” means a combination of reduced hourly rate fees plus a percentage of the client’s recovery or money saved. There are many benefits to a hybrid arrangement. The commonality of all contingency fees is that the attorney is sharing in the risk and therefore has a reason to win the case. The reduced hourly rate reduces the client’s cash outflow while allowing attorneys to fund their day-to-day operations. The hybrid keeps the cost of litigation down, which gives the lawsuit staying power and in turn increases the potential recovery.