Conventional wisdom among business executives and general counsel is to view litigation as a drain on company resources. Lawsuits are to be avoided if at all possible – something to pursue only as a last resort. Litigation, after all, places at risk precious business resources. And rarely is the amount necessary to pursue successful litigation justified by the risks associated with the pursuit.
There is an alternative to this conventional wisdom. It is true – there exists a model that allows for litigation to positively impact a company’s bottom line without ever requiring the company to pay legal fees other than from amounts recovered by the company. And important litigation can be pursued without a company shouldering all of the risks. This is the world of contingency-fee business litigation.
Contingency fee litigation is not new. It has been prevalent in personal injury cases for more than a century. Over the last decade, however, the contingency fee has emerged as an important – indeed sometimes critical – option in business cases. The concept is not novel – lawyers agree to base their fees on a percentage of what is recovered for the business. The business does not pay for any legal services unless and until there is a successful result and then any fees are taken out of the recovery. If there is no recovery, there are no legal fees for the company to pay. This model allows business executives and general counsel to protect their budgets while preserving the opportunity for large recoveries.
Contingency fees in business litigation can be appropriate in a number of scenarios:
- Recovery of damages caused by the misappropriation of company trade secrets by a former employee or competitor.
- Pursuit of insurance benefits from an insurance company that wrongly denies coverage.
- An outstanding debt or other money owed under a contract that seems too costly to pay a lawyer an hourly rate to pursue.
- Damage caused by a competitor who is unfairly competing.
- Royalties and other economic damages from a business using a company’s intellectual property (e.g., patents, trade-marks, and trade-dress).
- A small business that is harmed by a larger organization but does not have the resources to fight back.
- A large but cash-strapped company under tight legal budget constraints that needs a lawyer/partner to share risk.
One might reasonably ask, if a contingent fee in a business case is such a panacea, then why isn’t it used more frequently? The answer is simple – nearly all of the risk of an unfavorable result is shifted to the lawyers. Lawyers and law firms are historically risk averse and prefer the certainty of the billable hour. In addition, individual lawyer compensation is generally tied to fees earned under a billable hour model and most law firm compensation models do not account for contingent fee work.
Lawyers and law firms that accept business cases on a contingent-fee basis are more entrepreneurial and thrive on risk because they are familiar with it and equipped to properly evaluate outcomes. They also have a compensation model that allows for the risks associated with business contingent fee litigation. So before throwing in the towel on a business dispute that is heading to litigation, an executive or general counsel may be wise to explore whether there is a qualified and competent law firm with lawyers capable and experienced in pursuing business cases on a contingent fee basis.