Right way to structure contract with a lawyer without "open check"

[Taxing Matters]

Nearly every PI lawyer's fee agreement that I've ever seen (including the one my firm uses) is structured so that both the attorney's fee and the costs are deducted from the recovery before the client gets a check for whatever was recovered. If there is no recovery for the client, the client pays nothing. No matter how the fee is structured someone has to pay the costs. The costs are not known and in most cases can't be predicted with reasonable accuracy at the outset of the case. That's the reason the costs don't have a dollar limit on them. But consider this: why would the attorney go out and incur expenses that are not necessary for the litigation? The lawyer doesn't get any part of that, and the bar rules that apply to attorneys generally will prohibit the lawyer from using a close family member or friend who provides those goods and services because it raises the potential for a conflict of interest. The lawyer also has a fiduciary obligation to act in the best interests of the client. Also bear in mind that these attorney's fee agreements typically provide that in the event there is no recovery, the client pays nothing. There is thus risk for the attorney in taking on any case. If the case is lost, the attorney not only doesn't get the fee, he or she doesn't get paid anything on the costs because there is no recovery from which those costs may paid .

With that in mind, the problem I see with the contract language that you should ask the lawyer about is the part of the cost paragraph that says "NO RECOVERY, NO FEE". Read literally, it says that lawyer doesn't get a fee when there is no recovery but makes no mention about limiting the costs. But that statement is not needed because it's obvious from the fee structure that the client pays nothing if there is no recovery because 33% of nothing is nothing. So why have that redundant statement in there, and why have it in the paragraph for costs? I suspect some sloppy drafting and that the word costs was meant there rather fees. That's definitely something to ask the attorney about, and is good reason to see another attorney or two for their assessment of the case and how their fee agreement is written. If you truly have to pay the costs regardless of outcome, then you definitely want to ask other lawyers how they treat costs. Perhaps in your state the prevailing practice on costs has the client pay them even if there is no recovery, though I'm not aware of any state where that is the common practice for PI cases. Asking some other lawyers about costs will give you a good idea about that.

What most lawyers want is to get the client the most money in their pocket as possible after taking into consideration their fee. The reason they want that is that word of mouth is the best advertising a lawyer can get (putting aside those relatively few firms that use extensive advertising, and that gets into a whole other discussion) and the lawyer wants a client to say "My attorney John Doe got me $XXX,XXX in my lawsuit." On the flip side, the lawyer does not want disgruntled clients posting bad reviews online everywhere. Because of that and because of the fiduciary duty the attorneys have to their clients, the PI lawyers in my firm negotiate down the cost for doctors and other expenses on behalf of the client as much as possible to get the client the most money in his/her pocket. In addition to that, it common practice where I am to put in a provision in the fee agreement that the client's approval is necessary for most costs that will exceed a certain amount, e.g. $500. That particular provision is in all my firm's fee agreements, not just contingent fee cases. Is there something in the fee agreement you are reading that says something similar?

And I disagree with your assertion that no other business would have such a contract. A number of other businesses and professions use something similiar in which the contracts don't specify a specific price in advance for the materials and other costs incurred in doing the work when those costs can't be accurately forecast at the time the contract is made.

...ignores the fact that in the event of failure the lawyer can write-off his out-of-pocket whereas the hapless client can't.

"Writing off" the expenses is hardly a boon for the lawyer. For a simple example if I expend $100,000 in expenses for my practice, and my tax rate is 25%, that nets me an income tax deduction of only $25,000. Certainly helpful, but does not come anywhere near fully compensating me for what I spent. With that in mind, on a contingent fee case where I get nothing if I lose I don't want to run up unncessary expenses because if there is no award or settlement money recovered I eat those costs, and no rational business person would want to do that. The client comes out better in tax should they win because the entire recovery, apart from punitive damages, is excluded from the client's gross income while the attorney's fee is taxable income to the attorney. So I see a kind rough symmetry there.

 

[mvoltin]

Very good point Q

I think it will be helpful to provide more context that could help with the question:

Both Lawyer and I agree that the case has extremely high likelihood of being successful. So, in this context here is another specific example:

There is no implication that lawyers are evil or out there to get money, but it's a simple fact that if there is a money with no clear judiciary duty to protect it, it will be spent - just a human nature. So, if a policy amount is $300k and lawyer has 99% confidence that he/she is going to win the case, that means that they are likely going to get $100k. So, at this point, there is no incentive to be judicious with the remaining $200k and they may spend another $100k on various costs that may drive likelihood of winning the case to 99.5%. They still get $100k and they just increased chances of winning a case by 0.5%. So, the expense can arguably be justified, even though it reduced potential payment to a victim by 50%.

This is just a hyperbole to illustrate what I am trying to ask. The contract I posted above essentially is a blank check for incurring costs (One would rationalize potential cost very differently depending on whether it did or didn't affect their own profit - again, just a human nature).

I don't think any business would enter in that type of contract. So, I am asking if there are different models/ways to structure a contingency contract with a lawyer?

P.S. I was thinking of asking the lawyer what his average, maximum, and minimum costs were for the last 10 cases with similar contracts and then coming up with a model to build it into the contract as a fixed cost, or something like that. But, perhaps folks with more experience and expertise in this area can give a better advice. Thank you.

 

[mvoltin]

Nearly every PI lawyer's fee agreement that I've ever seen (including the one my firm uses) is structured so that both the attorney's fee and the costs are deducted from the recovery before the client gets a check for whatever was recovered. If there is no recovery for the client, the client pays nothing. No matter how the fee is structured someone has to pay the costs. The costs are not known and in most cases can't be predicted with reasonable accuracy at the outset of the case. That's the reason the costs don't have a dollar limit on them. But consider this: why would the attorney go out and incur expenses that are not necessary for the litigation? The lawyer doesn't get any part of that, and the bar rules that apply to attorneys generally will prohibit the lawyer from using a close family member or friend who provides those goods and services because it raises the potential for a conflict of interest. Politicians aren't allowed to use their knowledge for stock trading, but it happens all the time. I didn't mean literally a relative of a lawyer but another firm that they do business often and have friendly mutual relationship. I think one can argue this happens all the time. I don't mean that they will create new cost out of nothing but one makes very different argument about reasonability of costs depending whether their direct profits are impacted or not - it's just a human nature. The lawyer also has a fiduciary obligation to act in the best interests of the client. Also bear in mind that these attorney's fee agreements typically provide that in the event there is no recovery, the client pays nothing. There is thus risk for the attorney in taking on any case. As mentioned below, my attorney agrees that the case is very straightforward and winning the case is virtually guaranteed. At the same time, he referred to paying a videographer $500-$700 for each deposition (why not just put an iPhone on a tripod, is it reasonable to pay that much for a videographer?) And he mentioned few times about accident reconstruction since "police may have missed something" (I am guessing several thousand dollars if not more?) Not sure why would the accident reconstruction be needed since it's established by police there was a high speed and alcohol involved and the lawsuit is against an establishment that knowingly allowed minors to drink and drive? And we have all the videos and info proving the establishment knew they were minors and still provided alcohol and let them drive. So, the case is virtually guaranteed, even according to the lawyer. Mentioning a videographer for $500-$700, transcriptionist for the same amount, and accident reconstruction raised red flags for me. At the same time, lawyer came highly recommended by many. If the case is lost, the attorney not only doesn't get the fee, he or she doesn't get paid anything on the costs because there is no recovery from which those costs may paid .

With that in mind, the problem I see with the contract language that you should ask the lawyer about is the part of the cost paragraph that says "NO RECOVERY, NO FEE". Read literally, it says that lawyer doesn't get a fee when there is no recovery but makes no mention about limiting the costs. But that statement is not needed because it's obvious from the fee structure that the client pays nothing if there is no recovery because 33% of nothing is nothing. So why have that redundant statement in there, and why have it in the paragraph for costs? I suspect some sloppy drafting (also hope so) and that the word costs was meant there rather fees. That's definitely something to ask the attorney about, and is good reason to see another attorney or two for their assessment of the case and how their fee agreement is written. If you truly have to pay the costs regardless of outcome, then you definitely want to ask other lawyers how they treat costs. Perhaps in your state the prevailing practice on costs has the client pay them even if there is no recovery, though I'm not aware of any state where that is the common practice for PI cases. Asking some other lawyers about costs will give you a good idea about that.

What most lawyers want is to get the client the most money in their pocket as possible after taking into consideration their fee. The reason they want that is that word of mouth is the best advertising a lawyer can get (putting aside those relatively few firms that use extensive advertising, and that gets into a whole other discussion) and the lawyer wants a client to say "My attorney John Doe got me $XXX,XXX in my lawsuit." On the flip side, the lawyer does not want disgruntled clients posting bad reviews online everywhere. Because of that and because of the fiduciary duty the attorneys have to their clients, the PI lawyers in my firm negotiate down the cost for doctors and other expenses on behalf of the client as much as possible to get the client the most money in his/her pocket. In addition to that, it common practice where I am to put in a provision in the fee agreement that the client's approval is necessary for most costs that will exceed a certain amount, e.g. $500. (this helps, thank you. I have a friend who works for a large law firm as a manager and he had told me they collected 1/3 in costs and fees are usually 1/3. But their firm is "ambulance chasers" and not sure if they operate differently) That particular provision is in all my firm's fee agreements, not just contingent fee cases. Is there something in the fee agreement you are reading that says something similar?

And I disagree with your assertion that no other business would have such a contract. A number of other businesses and professions use something similiar in which the contracts don't specify a specific price in advance for the materials and other costs incurred in doing the work when those costs can't be accurately forecast at the time the contract is made. Yes for materials and costs but not for services that may or may not be tangible.



"Writing off" the expenses is hardly a boon for the lawyer. For a simple example if I expend $100,000 in expenses for my practice, and my tax rate is 25%, that nets me an income tax deduction of only $25,000. Certainly helpful, but does not come anywhere near fully compensating me for what I spent. With that in mind, on a contingent fee case where I get nothing if I lose I don't want to run up unncessary expenses because if there is no award or settlement money recovered I eat those costs, and no rational business person would want to do that. (again, in my specific case, we all agree the case is clear cut and there is virtually no risk for a lawyer to absorb/write off costs) The client comes out better in tax should they win because the entire recovery, apart from punitive damages, is excluded from the client's gross income while the attorney's fee is taxable income to the attorney. So I see a kind rough symmetry there.

First of all, thank you for the thoughtful response - this all makes sense. Please see my additional response (copied right below this paragraph) for more context and I provided some additional responses (questions/arguments within your text):

Both Lawyer and I agree that the case has extremely high likelihood of being successful. So, in this context here is another specific example:

There is no implication that lawyers are evil or out there to get money, but it's a simple fact that if there is a money with no clear judiciary duty to protect it, it will be spent - just a human nature. So, if a policy amount is $300k and lawyer has 99% confidence that he/she is going to win the case, that means that they are likely going to get $100k. So, at this point, there is no incentive to be judicious with the remaining $200k and they may spend another $100k on various costs that may drive likelihood of winning the case to 99.5%. They still get $100k and they just increased chances of winning a case by 0.5%. So, the expense can arguably be justified, even though it reduced potential payment to a victim by 50%.

This is just a hyperbole to illustrate what I am trying to ask. The contract I posted above essentially is a blank check for incurring costs (One would rationalize potential cost very differently depending on whether it did or didn't affect their own profit - again, just a human nature).

I don't think any business would enter in that type of contract. So, I am asking if there are different models/ways to structure a contingency contract with a lawyer?

P.S. I was thinking of asking the lawyer what his average, maximum, and minimum costs were for the last 10 cases with similar contracts and then coming up with a model to build it into the contract as a fixed cost, or something like that. But, perhaps folks with more experience and expertise in this area can give a better advice. Thank you.

 

[Taxing Matters]

P.S. I was thinking of asking the lawyer what his average, maximum, and minimum costs were for the last 10 cases with similar contracts and then coming up with a model to build it into the contract as a fixed cost, or something like that. But, perhaps folks with more experience and expertise in this area can give a better advice. Thank you.

The average costs over the last 10 cases the lawyer tried isn't a very good indicator of what the costs will be in your case. Each case is different, requiring different expenditures to put the case together. So the costs vary considerably from one case to another. Your case might have more or less in costs than the average. If your case doesn't require a lot of costs then a fixed provision in the contract will get you less money. The reverse is, of course, true for the attorney. Is that really a chance you want to take? If your case looks like a 99% winner then it may settle very quickly, and with little cost.

I'd never rate case by pinning some arbitrary percentage on the liklihood of winning, let alone predicting what the client will get. Doing that makes clients think that the outcome is going to be more certain than it really is, which can lead to disappointment for the client. I've seen juries award nothing in a case that looked like a surefire winner, and I've seen juries award a lot more than we thought it was worth. That's the kind of roll of the dice you take going into a trial. I'd suggest that if any lawyer you interview for your case makes promises about how likely you'll win and what amount you'll get that you pass on that attorney. That's the kind of attorney that shines the prospective client on in hopes of hooking him/her in as a new client.

It's the cases where there is more of a true controversy where you'll tend to see more in costs because the two sides need to gather more information and do more preparation to determine where they stand and what shot they have at convincing a jury that their position is better than the opposing side. Perhaps you can find an attorney who will do what you are looking for in your area. You may certainly ask lawyers you meet with on your case if they will agree to that. The worst thing that can happen is the lawyer says and declines the case.

Few if any PI lawyers in my area would set a fixed cost amount at the outset. My firm wouldn't consider it. But we are mindful of keeping costs as low as we reasonably can because (1) we have a fiduciary duty to do that and (2) we get happier clients that way, which is better for getting future clients than an unhappy client telling everyone they can how bad their experience was.

For what it's worth, it strikes me that you mistrust attorneys in general and thus fearful that most lawyers will try in some way to rip you off. With that perspective I can see why you are trying so hard to pin down some definite number for the costs. My experience in working with PI attorneys tells me that while some costs are predictable, a lot of costs are not. Lawyers don't want to be in the position of paying their client's costs out of their own pocket. It may also be that in your state such a lawyer fee agreement would be considered unreasonable by the courts or the bar, making the arrangement even more one sided in favor of the client.

You don't want to be represented by an attorney you don't trust. That kind of poisoned relationship tends to damage the case and works out badly for both client and lawyer. If you believe a lawyer is likely to pad the fees (and again, that doesn't benefit the lawyer to do that, it doesn't help the lawyer get more money in his/her pocket). If you are that mistrustful of attorneys, then I think you'll have trouble retaining one, and if you do, the relationship may not go well.

 

[mvoltin]

The average costs over the last 10 cases the lawyer tried isn't a very good indicator of what the costs will be in your case.

Thank you again for reading through the question and the thoughtful response, really appreciate.

You hit proverbial nail in the head: I have distrust of lawyers from all the stories I hear but most of my concerns are from more general perspective:

people operate certain way and if there is a money to be spent, it gets spent; and people rationalize expenses very differently depending if it affects their own pocket or not. It's just an universal rule. (I agree that the winning is not guaranteed and one can always state examples that are an exception rather then a rule in order to make a point. But it always help to put actual data for more context, most of time time (key is most of the time), when a lawyer accepts a case on contingency (after learning about the case), these cases are usually settled or won and lawyer gets paid. Again, in most of the cases. Here is a source stating 95% of injury cases are settled before trial and one can reasonably assume that lawyers get paid in majority of settled cases. So, yes, it's in lawyers' interest to say that "we have to write off all the cost and take huge risks" but that doesn't actually line up with the facts (although, I understand how one painfully remembers few cases where they had to absorb costs as opposed to vast majority of cases where they don't - again, a human nature)

Having said that, you gave very good advice about having provisions that state that expense over $500 should be discussed with the client, etc. I will use this and other points you have provided.

P.S. As a general guideline - is it reasonable to have to hire a videographer for a deposition recording and pay $500-$700? Can one use a tripod, iPhone, microphone? I am not talking about counting pennies here but these costs add up if it's decided to interview 20+ plus people. Same for a transcriber? Thank you.

 

[quincy]

Just sitting here thinking about how attorneys don’t have to accept clients, even if the cases the clients present appear to be slam dunks. Just as clients may choose to pass on hiring an attorney because they don’t trust or like the attorney, the reverse is also true.

 

[Taxing Matters]

P.S. As a general guideline - is it reasonable to have to hire a videographer for a deposition recording and pay $500-$700? Can one use a tripod, iPhone, microphone? I am not talking about counting pennies here but these costs add up if it's decided to interview 20+ plus people. Same for a transcriber? Thank you.

In my state you'd need to hire a videographer who can testify as to exactly what he/she did to take the video, what problems if any were encountered, verify that the video is complete and hasn't been tampered with etc. That way if the deposition video is challenged you have the testimony from a professional who can provide expert testimony about all of those things. Also, the videographer will be paying attention throughout the deposition for any equipment problems and immediately notify the attorneys so the problem can be fixed. You don't want lost or unuseable video because no one knew the camera was malfunctioning. If you just set up a video camera yourself, you might find yourself in a bind if there is a problem later. But I'm not in your state and I don't know what requirements it has for recording the testimony given nor do I know the generally accepted practice on this in your state. But even if it not required in your state, IMO it's a very good idea to go that route for the reasons I've just mentioned.

 

[quincy]

mvoltin’s distrust and/or dislike of lawyers is unlikely to be remedied by posts on a forum. I understand that costs of an attorney can seem excessive but there comes a point where you just have to let the professional you hire do the work you hired him to do.

 

[mvoltin]

In my state you'd need to hire a videographer who can testify as to exactly what he/she did to take the video, what problems if any were encountered, verify that the video is complete and hasn't been tampered with etc. That way if the deposition video is challenged you have the testimony from a professional who can provide expert testimony about all of those things. Also, the videographer will be paying attention throughout the deposition for any equipment problems and immediately notify the attorneys so the problem can be fixed. You don't want lost or unuseable video because no one knew the camera was malfunctioning. If you just set up a video camera yourself, you might find yourself in a bind if there is a problem later. But I'm not in your state and I don't know what requirements it has for recording the testimony given nor do I know the generally accepted practice on this in your state. But even if it not required in your state, IMO it's a very good idea to go that route for the reasons I've just mentioned.

Thanks again for the response, this is really helpful and appreciate it. I have to do additional homework to be able to frame a contract that I think would be fair and propose to the lawyer I spoke to. The lawyer is great himself as a person and totally open to work on a contract with me. But the contract is with a big firm (which is profit oriented) and want to make sure my interests are protected as much as theirs. Thanks again for your input.

 

[mvoltin]

Thanks again, @LdiJ, @adjusterjack, and @Taxing Matters for the thoughtful responses. Apologies, didn't notice responses from LDIJ and AdjusterJack until now. I realize developing a contract that would account for the issues I raised could be complex and difficult. If an attorney is fronting the cost, I really cannot/shouldn't tell him what he should spend money.

But I want to get this done fairly and principle of fairness here is more important to me than the outcome. This is not a frivolous case (without going into the details) I am looking for justice for someone and on behalf of many. At the same time, the attorney is a nice guy and don't want to insult him with a contract proposal that would be unacceptable from the outset. (My arguments were never about an attorney - it's about human behavior and how contracts influence it)

So, here is what I was thinking and please let me know if this is something that a lawyer would consider:

I am going to give the lawyer a retainer and pay for their work (whatever hourly rate). That way, the lawyer is taking no risk and I have more input in costs. And then, if the case is won (settled), I would propose a bonus that would increase total attorney fee to 10%-15% of the settlement value. For example, if the settlement was $1,000,000 and attorney fees were $25,000, they would get additional $75,000 for a total of $100,000. Costs remain separate and I pay. If case is lost, I lose but attorneys lose nothing (they got paid for their work per hourly rate).

Thank you.

 

[Zigner]

So, you want to pay the attorney MORE than s/he earns?

 

[mvoltin]

So, you want to pay the attorney MORE than s/he earns?

I think you meant to say more than s/he charges (as opposed to earning) and the short answer is yes. I think we may digressing into the whole behavior science and best ways to incentivize employees/contractors/people and that would be outside the scope of this question but here is the short rationale:

If an attorney know/believes that the case winnable, s/he will focus on winning the case and producing maximum settlement rather than focusing on accruing chargeable hours. (assuming 10% of the settlement is more than what they charged in fees). I seems fairer to me, it seems it would produce a better quality work and results, and it rewards attorney for good work beyond what they charged.

But it's possible I am missing something. Hence the question here.