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Beware of CLAUDE: The Curse of The Contingency Fee!

By: Marshall R. Isaacs

The contingency fee is the bane of my existence. It’s been overused, abused and now mars my beloved profession.

Every day, I get calls from potential clients who are interested in my business litigation services. A typical call lasts about twenty minutes. I get the basic facts and determine if the case is a good fit. Then I quote my hourly rate. That’s where most calls end. The client was looking for a “contingency-fee lawyer.”

A few weeks ago, I got a call from someone being sued for a hundred thousand dollars or so. He asked if I could defend him on a contingency fee basis. When my momentary incredulity subsided, I knew it was time to write this piece.

Let’s be clear, the contingency fee is well-suited to a limited number of legal specialties such as personal injury and consumer collections. If you are using it otherwise, you’re probably doing yourself, your client and your colleagues a disfavor.

The contingency fee is perfect for personal injury. In personal injury, the attorney’s fee is generally secured by an insurance policy. When the case settles, the Good Hands People mail the plaintiff’s lawyer a check for thirty-three and a third percent. It’s a beautiful thing.

Volume consumer collections are also ideal contingency fee cases. Most collection lawyers handle thousands of cases for only a handful of clients such as medical offices or credit card companies. Each case is worth only a few hundred or a few thousand dollars. Collection lawyers work on the Pareto Principle or 80/20 rule. That is, they receive eighty percent of their fees from twenty percent of their cases. The remaining cases are usually negligible and, in the end, neither the attorney nor the client cares what happens to them.

The contingency fee is not, however, appropriate for the vast number of cases in which it is currently utilized. With few exceptions, no attorney should accept a contingency fee in a complex litigation against an uninsured defendant (“CLAUDE”).

The biggest problem is that no one has any money in this economy. Even then, money is incredibly easy to hide. Moreover, cases involving fraud, unpaid wages and breach of contract often come into being because the culpable party stole money or ran out of it. Thus, the attorney who accepts CLAUDE on straight contingency is likely excavating a dry hole.

A second problem is that defendants often interpose a counterclaim for tactical reasons. Even if frivolous, the unwitting contingency fee attorney suddenly finds himself working for free.

Finally, contingency fee plaintiffs tend to take advantage of their attorneys. As they are not being charged, contingency plaintiffs are undeterred from calling, emailing or visiting the office as often as they like, without regard for their lawyers’ time and obligations.

When it comes to CLAUDE, use of the contingency fee can also be prejudicial to the client. I have seen it time and time again: Upon realizing that there is no pot of gold at the end of the rainbow, Plaintiff’s counsel becomes discouraged and begins to neglect CLAUDE. When the client calls, the attorney limply mutters, “I’m working on it,” assuming the attorney picks up at all. That’s when the ethics and malpractice allegations start to fly. I know this because I’m the first person the disgruntled client calls.

One option I strongly advocate is the “hybrid” or “mixed” retainer, which involves a combination of the contingency fee with an hourly or flat-fee rate. A common contingency fee rate is 33 1/3%. A mixed retainer, on the other hand, might involve a 20% contingency fee and an hourly rate reduced from $250 to $125 per hour. The mixed fee ensures that the attorney ultimately receives at least some compensation for his or her services and deters clients from overstepping their bounds.

In my opinion, the contingency fee is a necessary evil. It gives the “little guy” affordable access to our justice system. But beware! If you use a straight contingency fee, CLAUDE may come back to haunt you!

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This page contains a single entry from the blog posted on May 17, 2010 3:56 PM.

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