Has the Covid-19 Recession Made a Contingency Fee Agreement Right for You?

Times of economic stress may reveal trust asset mismanagement. Beneficiaries often react to a substantial decline in a portfolio’s value by scapegoating a trustee for the impact of the downturn. A flagging economy does not abate potential claims concerning the validity of a trust instrument or will, often based on a claim of lack of testamentary capacity or undue influence. The economic impact of the Covid-19 pandemic will discourage litigants and potential litigants from financing costly litigation using cash reserves. Individuals may consider liquidating depreciated assets to pay attorney’s fees as an undesirable option. Trust contestants may be loath to hire an attorney on an hourly basis and risk turning an expected inheritance into a loss. Alternative fee structures may provide a solution. Chief among these is the contingent fee agreement most commonly associated with personal injury litigation but used in trust and estate litigation as well.

In the typical contingent fee agreement, the client pays the attorney a percentage of the recovery if there is one. The percentage varies depending upon the stage of the litigation when the client realizes a recovery. In its most basic form, one percentage applies prior to trial; a higher percentage applies once trial begins. It is also possible to have many points at which the percentage changes, e.g., prior to litigation, after sequential time periods following counsel’s retention, when the court sets a trial date, when expert discovery commences, etc.

A defendant, of course, will not realize a recovery. A contingent fee arrangement may nevertheless be possible in representing a defendant – called a success fee – based on the amount the defendant saves as measured against an agreed predetermined outcome. For example, a success fee could be based on the difference between the amount of a settlement or judgment and $2 million. No fee would be payable if the settlement or judgment exceeds the $2 million benchmark. In this case too, the percentage may vary depending upon the stage of the case at which the matter resolves. For the success fee arrangement to work, however, the attorney may want a large retainer to serve as collateral for the fee if it comes due. The collateral need not necessarily be cash, but the client must agree to allow the attorney to liquidate non-cash collateral if the client does not pay the fee in cash shortly after the matter’s resolution.

In the “pure” contingency arrangements, the law firm takes all of the risk of success: unless the plaintiff realizes a recovery or the defendant achieves a savings relative to the predetermined outcome, no fee is payable. But with increased risk comes increased reward. Attorneys who also work on an hourly basis will not accept the risk absent a clear potential upside relative to the expected fee computed on an hourly basis. Hybrid-contingency fee agreements share the risk more equally, reducing the attorney’s fees that the client must pay while likewise ensuring that the law firm receives a fee regardless of the outcome. In the most typical hybrid-contingency fee arrangement, the client pays an hourly fee less than the attorney’s regular rate –specified either as a percentage of the regular rate or a fixed amount – and a contingent percentage that is correspondingly less than the percentage would be in a “pure” contingency fee arrangement.

Other more nuanced options also exist. In any of these arrangements, any hourly or percentage fee is determined by negotiation. Rule 1.5 (a) of the California Rules of Professional Conduct also requires that any such fee arrangement not be “unconscionable.”

Please feel free to call us with any questions if you would like to explore this topic further.