Lawyer contingency fee arrangements make it possible for virtually anyone to hire a lawyer and file a lawsuit. It’s important to understand how contingency fees work and what makes a valid fee agreement.
What Is a Contingency Fee?
A contingency fee is payable only if a client wins their case. If the parties reach a settlement before the case goes to trial, the contingency fee is a percentage of the settlement. If the case goes to trial, the fee is a percentage of the damages awarded in court.
For example, a person is injured in a car accident and believes that the other driver is at fault. Medical and car repair bills are piling up. The injured party wants to hire an attorney to sue the other driver for damages, but can’t afford to pay hourly attorney fees. Under a contingency fee arrangement, the personal injury attorney gets paid only if the lawsuit is successful or a settlement is reached.
A lawsuit involves many costs other than attorney fees. An attorney will often cover these costs and receive reimbursement from the contingency fee. Examples of lawsuit costs include:
- Filing fees for state and federal courts
- Fees for court personnel during depositions
- Fees for obtaining documents
- Expert witness fees
- Copying fees
A single lawsuit often involves multiple depositions and expert witnesses, adding hundreds or even thousands of dollars in fees. Costs can mount up quickly, making a lawsuit too expensive without a contingency fee.
Probate and Estate Cases
Although relatively rare, contingency fees may be appropriate in some California probate and estate cases. An attorney who is handling the actual probate of an estate must charge a fee as required by the California Probate Code. However, a probate attorney who is not handling the probate of an estate but is representing a beneficiary or other interested party may accept a contingency fee arrangement.
For example, an heir argues that another family member should not get a share of the estate. The other family member hires a probate attorney to represent them. The probate attorney and client agree to a contingency fee that will be paid out of the settlement. If there is no settlement for the client, the attorney receives no pay.
In California, contingency fees are usually 40 percent of the award, but they may vary based on the complexity and risks of the case. Generally, cases that are more complex require more expert witnesses, document fees and other expenses. There is no set formula for contingency fees.
The percentage may be lower if the case is settled before a trial or arbitration date. For example, the contingency fee may be 30 percent for a settlement and 40 percent once the case goes to trial. This fee structure gives the client incentive to settle the case quickly and allows the lawyer to avoid paying court costs and fees upfront.
Requirements for Contingency Fee Arrangements
In order to be enforceable, a contingency fee agreement must meet certain requirements. These requirements ensure that the fee is reasonable and that the attorney and client agree on the fee. If the arrangement fails to meet any of these requirements, it is not enforceable.
A contingency fee must not be unconscionable, according to the California Rules of Professional Conduct, Rule 4-200. In other words, a fee must be reasonable according to a number of factors including:
- Amount of the fee compared with services rendered
- Client’s level of understanding compared with that of the attorney
- Complexity and novelty of issues as well as the skill required for legal services
- Likelihood that taking the case will prevent the attorney from taking other cases
- Time limitations
- Nature and length of the attorney’s professional relationship with the client
- Experience and reputation of the attorney
- Time and labor
- Client’s informed consent
What if the contingency fee turns out to be more than the attorney would have charged at an hourly rate? The fee is still valid if it fulfills all the above requirements.
Requirements of the Agreement Itself
The contingency fee agreement itself must meet certain criteria, according to the California Business Code Section 6147. Even if the fee is reasonable, the agreement is void if it falls short of these requirements. The attorney must give the client a copy of the agreement, which must be in writing and signed by the client and the lawyer. In order to be valid, it must include the following:
- The contingency rate that the client and lawyer have agreed upon, including an explanation of how filing fees, medical reports and other costs will affect the contingency fee and the damages that the client will recover.
- Additional amounts that the client will have to pay for matters that arise during the progress of the case. For example, the client may have to pay their attorney to negotiate with an insurance company that has placed a lien claim.
- A statement that the fee is negotiable between the client and lawyer and not set by law, except for cases involving healthcare providers.
- In a case against a healthcare provider, the agreement must state that the rate is the maximum limit and that the client and attorney can agree to a lower fee.
If any of these requirements are not met, the client can void the agreement. The court will then determine a reasonable fee that the attorney can collect.
Sometimes an attorney will need to bring other attorneys into a case. For example, another lawyer may have experience or specialized training in an area relevant to the case. The attorneys can share the contingency fee, provided that the fee-sharing agreement fulfills Rule 2-200. According to this Rule, an attorney may not share a fee with an attorney who is not a member or shareholder of the same firm unless both of these conditions are met:
- The client consents in writing under full disclosure, and
- The total fee is not unconscionable and is not increased solely due to fee sharing
A written agreement protects the client as well as the attorneys who are sharing fees. The client has the right to know how the fee will be shared and the reasons for sharing the fee. Having the agreement in writing demonstrates to the client that they have the right to reject the fee-sharing agreement. The agreement protects the attorneys because it ensures that they understand and agree to the division of fees, workload and responsibilities.
Examples of Voidable Agreements
A contingency fee agreement can be unenforceable for a variety of reasons. Since attorneys rarely keep time logs when working on a contingency basis, failure to adhere to these standards can make it nearly impossible to prove that a contingency rate is reasonable. It is therefore imperative that a fee arrangement contain all necessary provisions.
Factors that can make an agreement voidable include:
- Failure to state that the fee is negotiable, even if the client verbally agrees to the fee
- An unconscionable fee — the person who claims that the fee is unconscionable has the burden of proof
- Material changes to the agreement that do not satisfy all requirements of an agreement
Advantages of Contingency Fees
Contingency fees benefit clients, attorneys and society in a variety of ways.
Advantages for Clients
The most obvious advantage for the client is the ability to hire a lawyer without having to pay upfront. In California, the hourly pay for an attorney can be hundreds of dollars, which would put a lawsuit out of reach for many people. With a contingency fee, an attorney gets paid only if the client wins at trial or settles out of court. This arrangement levels the playing field and gives more people access to the legal system.
If someone is injured in a car accident, for example, they don’t have to worry about hourly bills when deciding whether to file a lawsuit. Their lawyer will be paid out of the award or settlement.
A contingency fee also provides an incentive for the attorney to work diligently on a case. If the client wins, the lawyer wins, too. A poor client can feel confident that their lawyer will work as hard for them as they would for a wealthy client.
A potential client can meet with multiple attorneys before deciding which lawyer to hire. They can ask questions about the fee rate and even request a lower rate if the parties settle before the trial date.
Advantages for Attorneys
A contingency fee arrangement gives an attorney flexibility when deciding how to approach a case. When an attorney bills at an hourly rate, they must constantly weigh the costs of expert witnesses, document fees and other costs.
Let’s say a client has sued a manufacturer for defective parts and their attorney needs multiple expert witnesses for the case. With hourly billing, they would have to contact the client and ask the client to weigh the cost of each witness. A contingency fee, on the other hand, lets the attorney make decisions and handle the case as they see fit. The ability to call expert witnesses without worrying about cost makes it possible for the attorney to prepare an effective case.
Another advantage is that an attorney may end up making more money with a contingency fee than they would on an hourly basis. A 40 percent share of a multi-million dollar settlement could be much more money than an hourly fee. It can be a win-win situation, with the client and attorney both benefiting from the award.
Advantages for Society
By allowing people of all income levels to file lawsuits, contingency fees add a layer of accountability to large corporations. If a person with low income is injured by a defective appliance part, for example, they can sue the manufacturer for damages.
Contingency fees help prevent attorneys from filing “frivolous” lawsuits. Lawsuits that are without merit take up court time and resources. If a lawyer will be paid only if the client wins, they will only accept a case if a client has a realistic chance of winning. A lawyer would not want to pay court fees and devote hours of work if they cannot recover those costs from a settlement or award of damages.
Disadvantages of Contingency Fees
No system is perfect, and contingency fee arrangements do have their disadvantages. Under certain circumstances, clients and attorneys may be better off with an hourly fee arrangement.
Disadvantages for Clients
A contingency fee is not always the best option for a client. The main disadvantage for clients is that they may end up paying more than they would have at an hourly rate. An hourly fee may be a better choice for a client who can afford the fee and feels confident that they will win their case.
Disadvantages for Attorneys
Of course, a disadvantage for lawyers is the risk that they will not make any money if their client loses the case. If the attorney pays court costs and filing fees, they will not be able to recoup their expenses. An hourly fee guarantees that the attorney will be paid for their services.
Disadvantages for Society
Some argue that contingency fees give lawyers an incentive to turn down smaller cases. They claim that attorneys only want to take cases with the potential for the highest contingency fees. These critics advocate putting a cap of 10 percent on contingency fees, making high-dollar cases less attractive.
This argument, however, is debatable. A 10 percent cap would almost guarantee that attorneys would lose money if they take smaller cases. Ten percent of a $5,000 case would only be $500, which would probably not be enough to make the case worthwhile for an attorney. People who cannot afford the hourly fee would once again be pushed out of the legal system.
Quirk Reed LLP Personal Injury Attorneys Putting the Client First
When it’s time to file a lawsuit, it’s important to find an attorney who makes their client’s interests their priority. A contingency fee agreement guarantees that the lawyer and the client both want to win. At Quirk Reed, we fight for our clients every day. Contact us for a free consultation.