17.05. Contingency Fee Agreements

Contingency fee agreements are engagements in which the lawyer and client agree  that the client will not pay the lawyer a fee unless the lawyer recovers money in the case.  The lawyer and client agree that the lawyer will take a percentage of what is recovered.  Contingency fee agreements provide a lawyer to those who otherwise would not be able to afford one.  We most often hear about cases that are successful that are taken on a contingency basis – where the lawyer obtains a large fee.  For example, in the case involving the 79 year old who was burned by McDonald’s coffee, after a seven day trial and four days of deliberation the jury returned a compensatory award of $160,000 and $2.7 million on punitive damages.[1]  The trial judge reduced the verdict to $640,000 and the case ultimately settled for less than $600,000.  Assuming the settlement was $600,000 and that the attorney’s fee was 30% of the recovery, the attorney received $180,000 plus expenses.  But consider this case as the lawyer first evaluating it.  The first demand (from the family) to McDonald’s for $10,000 to cover medical bills.  McDonald’s responded with an offer of $800.  Before the case went to trial, the plaintiff’s attorney attempted to settle twice out of court – McDonald’s refused.  The point of this is to show that contingency fees have risks for the attorney accepting them.  Here, the attorney who accepted the case and took the case to trial – and invested hours and money (for experts, etc.) – assumed the risk that he would lose that investment.

Undertaking this risk is what justifies a lawyer recovering more in a contingency fee case than they would be entitled to if it was an hourly rate matter.  If, in the McDonald’s case above, the lawyer accepted the case on an hourly rate basis at $250 per hour and he spent 250 hours on the case – a reasonable fee would be $62,500.  Could $180,000 be a reasonable fee on a contingency when it would not be on an hourly rate representation?  Yes:  “it may be necessary to provide a greater return than an hourly fee offers to induce lawyers to take on representation for which they might never be paid, and it makes sense to arrange these fees as a percentage of any recovery… In other words, plaintiffs may find it difficult to obtain representation if attorneys know their reward for accepting a contingency case is merely payment at the same rate they could obtain risk-free for hourly work, while the downside is no payment whatsoever.”[2] Recall also that a contingency fee agreement is an exception to the traditional rule that a lawyer cannot have a propriety interest in the cause of action or subject matter of the litigation (Rule 1.8(i)(2)).  This exception is largely based in the benefit of contingency fee agreements as a matter of public policy.  In addition, the interest and risk that the lawyer assumes in a contingency fee agreement largely aligns with the client – both are seeking to maximize the recovery received.  The primary ethical concern with contingency fees is the need to make sure that the client understands precisely what they are agreeing to.  Disputes over the amount of fees or expenses a lawyer should recover at the end of the representation is common.  Therefore, Rule 1.5 sets out in detail what must be included in a contingency fee agreement.

[1] If you want to see a summary of the case, including a discussion of the legal strategy of the plaintiff and McDonald’s defense see https://www.nytimes.com/video/us/100000002507537/scalded-by-coffee-then-news-media.html?playlistId=100000002148738 (last visited Nov. 25, 2019).

[2] Abrams & Abrams v. Nat’l Union Fire Ins. Co., 605 F.3d 238 (4^th Cir. 2010).