In the legal world, there are a lot of outlying factors to consider when setting up a new law firm or maximizing an existing one. And one of those factors is determining whether or not your firm needs a contingency fee, and, if so, how much that contingency fee should be.
- Ask your network
- Discover your state’s rules
- Weigh all the factors
- Get familiar with other types of contingency fees
- Secure informed consent from clients
What are contingency fees?
Law firm contingency fees are rates that a client agrees to pay after a lawyer successfully wins the case. Typically, these fees are agreed upon for cases involving money claims, such as workers’ compensation or personal injury. If the lawyer wins the case, they’re given a certain percentage of the money claimed. If not, then neither the lawyer nor the client receives any money. While in the latter situation, the client doesn’t have to pay the lawyer for working on the case, there are still court filing fees and other costs that occur, no matter if the lawyer wins or loses.
Lawyers who use contingency fees—also referred to as “no win, no fee” lawyers—can exist in almost any specialty area. However, contingency can only be used in civil litigation, not criminal justice. While the percentage of the fee varies by lawyer, typically contingency fees are 33 ⅓ percent of the case if a lawsuit is not filed and 40% if a lawsuit is filed.
5 Tips to establish contingency fees
Now that the basics of law firm contingency fees are covered, it’s time to go over the five best tips for determining your law firm’s contingency.
#1 Ask your network
Unfortunately, there are no hard and fast rules on contingency fee percentages in the legal industry. Books and statutes will give a lot of vague information but no straight answers on what’s reasonable for you and your clients. Because of this, it’s helpful to reach out to your colleagues and mentors for advice.
Sure, it can be a little awkward and uncomfortable to ask your peers what their contingency fee percentages are, but it’s one of the few ways to collect accurate data about rates in your area. And if it’s people you’ve worked with for some time, they most likely won’t mind the question. Just be polite, professional, and make sure they know that they only have to answer if they’re comfortable revealing that information.
#2 Discover your state’s rules
Once you’ve gathered examples from your colleagues on their contingency fee percentages, it’s important to verify that information against your state’s rules. This might seem obvious, but many lawyers fail to do so then have to pay for it later. And as an attorney, you know that rules change all the time.
So before you set your own contingency fee, spend some time getting to know the rules and regulations within the state you’re practicing. Be sure to make a note somewhere in your calendar to do an annual check in to see if those rules have changed to avoid falling into any unnecessary ethical traps.
#3 Weigh all the factors
You would think that having your colleagues’ data and your state rules would be enough to determine a reasonable percentage, but they might not.
Every state has a complex set of factors used to determine the reasonableness of client costs in addition to a set of rules about the fee. Get comfortable with these factors and weigh the average percentage from your colleagues against them. Spending some time scrutinizing now will save you a lot of headaches down the road.
#4 Get familiar with other types of contingency fees
That’s right—there’s more than just the standard type of contingency fee. Lawyers also have to consider using reverse contingency fees and hybrid fee arrangements.
In reverse contingency fees, lawyers are given a percentage based on how much money they saved the client rather than how much money the client was rewarded. For example, if you’re representing a client who is being sued for $1 million, but you negotiated the settlement down to $100,000, then you would be given a percentage of the $900,000 you saved the client.
Reverse contingency fees get tricky because someone can sue for an outrageous amount of cash that is unlikely to be paid in full. So a lawyer may have just negotiated down to a more reasonable rate, not really “saving” any money at all. However, because of the problems that can arise with these cases, they are very uncommon.
Hybrid fee arrangements, on the other hand, are a little more common. They include both a fee that’s based on the lawyer winning the case and the lawyer’s fixed, hourly rate. These arrangements must also hold up to the state’s requirements regarding contingency fees, but the fees are more of a bonus rather than the lawyer’s entire paycheck.
#5 Secure informed consent from clients
No matter how brilliant a lawyer you are and how hard you work to win your clients’ cases, you always run the risk of a client refusing to pay the agreed-upon contingency fee. They can then complain to the state bar. When you’ve done your homework and crafted a reasonable fee, this is unfair. But it happens, and it helps to be prepared for it.
It’s imperative to get informed consent from your client that explains the risk of the case, the likelihood of securing a victory, and the monetary amount that you could be taking home if the case is won. A good statement to use in your Informed Consent Agreement is the following: “the fee is not set by law but is negotiable between attorney and client.” A written and signed agreement protects both you and your client from any surprises at the end of the trial.
As confusing as they are to navigate and understand, contingency fees are standard practice in most law firms. They not only provide a great incentive for lawyers to win cases, but they also give an avenue for those who can’t afford legal help to have it.