InsideCounsel » February 2008
Piece of the Pie
Two cases highlight the perils of contingency fee arrangements.
The use of contingency fee arrangements has become increasingly commonplace—and not just among plaintiffs in slip-and-fall cases, but in corporate America as well. While surveys of in-house counsel show legal departments still overwhelmingly prefer flat or hourly fee arrangements, more and more companies are working with outside counsel on a contingency basis.
“From the point of view of the company, it cabins the litigation cost and insulates the company from huge out-of-pocket expenses that commercial litigation can entail,” says Lester Brickman, a professor at Cardozo School of Law who studies contingency fees.
Deborah House, vice president and deputy general counsel for ACC, says the increase in contingency fees comes in response to the increasingly high cost of litigation and the ensuing demand for value-based billing. “It makes the outside counsel much more invested in making determinations about what needs to be done and what doesn’t,” she says.
Such comments seem to suggest that contingency arrangements are the perfect solution to ensuring outside counsel’s interests are in line with those of their clients and that lawyers aren’t filing needless motions just to pad their billings. But two recent court battles exemplify that the arrangements have their drawbacks.
In a D.C. Circuit case decided in October 2007, a law firm sued its client because the law firm lost out on its contingency fee when its client decided to drop the case. And in a case the Supreme Court of New York ruled on November 2007, a widow in an estate dispute challenged the fairness of a contingency arrangement that had her paying millions of dollars to her law firm.
“There are negatives to contingency fees in that the very dynamic that can be viewed as positive—that is, an aligned interest between lawyer and client—can highlight differences of interest,” says Mark Zauderer, a partner with Fleming Zulack Williamson Zauderer who represented the law firm in Lawrence v. Miller, the New York Supreme Court case.
Differing Interests
The D.C. Circuit case, King & King v. Harbert International, underscores that when a lawyer and a client wish to take different approaches, pre-existing contingency arrangements only complicate matters.
Harbert International Inc. had worked with King & King since the early 1980s on an hourly basis. In 1995 they began working under a blended contingency agreement: The firm would charge $150 an hour, and those hourly billings would later be deducted from contingent recovery of 20 percent of the first $2 million recovered and 25 percent of any greater recovery. Harbert was seeking a $12.8 million adjustment to a construction contract it held with the government.
King & King filed the claim on behalf of Harbert in 1994 before the Armed Services Board of Contract Appeals (ASBCA). Amid company restructuring as well as a DOJ criminal investigation into alleged fraud and bid rigging, the ASBCA in September 1998 dismissed the claim without prejudice—as long as the company refiled the claims by September 2001. When the deadline rolled around, King & King couldn’t get in touch with Harbert’s president, so it refiled on its client’s behalf. Harbert refused to cooperate with the firm. As a result the ASBCA dismissed the claims with prejudice in 2002.
By that point, King & King had invested a lot of time and resources in the matter. It sued Harbert for $4.8 million—the amount it would have received under the contingency agreement if it had obtained a full recovery.
