Call Today216.600.0114
William Eadie | Apr 16, 2014

Why are They Called "Alternative" Fees, Anyway?

Categories: Business Litigation

The ABA Journal recently published a short online piece asking whether “alternative fees work in litigation matters,” based on a Washington Post piece. The article cited two examples of firms setting the pace for “alternative fees,” whether on a cost-plus basis (how much it costs the firm, plus some profit) or by phase of a case (investigation, discovery, trial preparation, trial and appeal, etc.).

Crowell & Moring partner Kathy Kirmayer talks about aligning interests through cost-plus: if an attorney is getting a flat “plus,” then their incentive, the argument goes, is to work quickly and efficiently. But the “cost” in “cost-plus” is still (wait for it) the rate of the attorney. That rate might be pegged to the actual cost of the lawyer, but from the law firm’s perspective, a working lawyer is still a covered cost, albeit one that could be making more profit for the firm if they handle matters more quickly. Assuming there is enough work.

So what makes this “alternative”? It works for the client, so what’s the hold up? The hourly-billing mindset is entrenched in major firms because of what those firms provide: advice and defense. Being part of a business litigation firm with its roots outside the defense—specifically, in the contingency-fee plaintiff’s realm—these types of arrangements seem more conservative than alternative.

What even the “alternative” approaches miss are the cases where the business client is not defending, but litigating as a plaintiff to recover funds. Cost-plus cuts close to eliminating the built-in conflict between the clients goals (always a variation of the best result for the lowest cost), and the law firm’s income under an hourly billing model (the longer a project takes, the more the firm makes). But it doesn’t do away with it altogether.

A contingency fee model eliminates the conflict altogether, by shifting payment from how long something takes to how good the result is. In fact, the client entirely eliminates the risk of a loss under this model, since the lawyers don’t get paid at all for a loss. And that’s what has law firms averse to crossing over to contingency fee work: they can’t stomach the risk of a loss with their business model. The alternative is forcing the client to shoulder the risk.

Law firms aren’t always quick to educate their businesses clients about these alternatives—assuming they even know about them. They should be! When a traditional business law firm forms a relationship with a boutique contingency business litigator, they get the best of both worlds: a true trial attorney able to aggressively work for the client with pure alignment of interests, and a partner that cannot (and does not want to) handle any of the client’s other work. The benefit to the client is clear: no interruption of cash flow, little to no risk, and the ability to capture funds they otherwise might have to leave on the table in the face of potentially unlimited attorneys fees going after it.

The risk to law firms is small in partnering with pure litigation, contingency based firms. Contingency fee firms by and large don’t have transactional or advising practices—it isn’t in our DNA. I have a business degree, and work with business people learning the ins and outs of their business for a matter. But I’d never purport to advise that business after the matter is complete. If they call for advice—which has happened--I get referring business counsel on the phone.

This model does not fit for plenty of litigation, such as defending a lawsuit with no counterclaim. But when a business is looking at a loss caused by a breach of contract or insurance broker negligence, traditional law firms should add a boutique litigation firm to their arsenal. Clients will be much happier seeing money come in with minimal risk and cash flow impact. And the law firms are not at risk of farming out their best clients to a competitor.

Are you a lawyer who has experience with different billing models? A business manager or GC who sees litigation costs?