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Category: Fee Economics / Fee Market

Demand for Contingency Fees Grows Amid Pandemic

November 30, 2020

A recent Law.com story by Dan Roe, “Demand for Contingency Fees in Business Litigation Grows Amid Pandemic,” reports that contingency fees are not only confined to personal injury matters.  In the midst of the recession and pandemic, some firms are increasingly taking on contingency fee matters in business litigation and commercial cases.  Business owners who don’t have the cash on hand to front litigation costs are turning to law firms that work on contingency and are willing to absorb case costs, say firm leaders, who report a rise in contingency fee inquiries since the beginning of the pandemic.

Morgan & Morgan is one of the largest personal injury firms in the country, but it also has a 24-lawyer group dedicated to business disputes.  William B. Lewis, the firm’s business trial group co-managing partner, said the practice has seen a 20% to 25% increase in contingency cases — the only type they do — since the pandemic began.  The firm recently hired an associate out of law school to join the group and plans to hire three or four additional attorneys in the next six months.

The cost of hiring an hourly law firm or trying a case can exceed the cash positions of many businesses with legitimate disputes, said Lewis in an interview.  “Trying a case can cost almost as much as everything leading up to it,” Lewis said.  “Even in a two year litigation cycle, it could be $300,000 in attorney’s fees to try a case.  There are pressure points for folks to settle even if they have a valid, strong claim.  We allow clients to try cases because they don’t have to pay huge amounts to get cases in front of a jury.”

Commercial litigation boutique Cain & Skarnulis in Austin, Texas, is also taking an increased number of cases on contingency.  “There are some good business contingency fee cases coming,” founding partner Steve Skarnulis said in an interview.  “I’d estimate that over the last six months we’ve seen inquiries for at least twice as many contingent fee cases and have probably taken 25% more than we normally would.”

And in New York, the commercial litigation boutique The Stolper Group is also seeing more contingency fee questions than usual.  “There’s definitely been an uptick in inquiries,” founding partner Michael Stolper said in an interview.  “Those who do commercial contingency have to be very selective in cases so I wouldn’t say we’re doing more or less than before, but there have been a lot more inquiries now during the pandemic.”

Financial hardship and disputes that stem from it are driving demand for contingency fee arrangements, firm leaders say.  “We’ve had investment loss cases, securities cases where brokers mismanage money and dump everything into an account after the pandemic when they didn’t have the authorization from the client to do so, an uptick in legal malpractice, and real estate commission cases,” Lewis said about the type of matters Morgan & Morgan has handled on contingency.

The firm’s business trial group is also representing community associations in construction defect claims because of the high costs involved in litigating and the fact that community associations hesitate to shift those costs onto their members, Lewis said.  At Cain & Skarnulis, landlords are turning to the litigation firm to handle disputes with commercial tenants on a contingency fee basis, Skarnulis said.

Firms that specialize in commercial contingency may offer a number of fee arrangements, based on the details of the case.  Tiered fee arrangements such as those at Morgan & Morgan’s business trial group may charge 25% to 35% for an early resolution, whereas a more time-consuming trial may net the firm 35% to 45% of a judgment.  Other firms engage in hybrid arrangements, where attorneys charge a reduced hourly rate and a smaller percentage of a recovery.

Clients may look to firms to absorb case costs as well.  Court costs and associated fees such as electronic document management can cost in the hundreds of thousands of dollars, Lewis said, so firms may also agree to front those costs in exchange for a higher percentage of the recovery.

Big Law firms may not be promoting contingency arrangements, but that doesn’t mean they aren’t doing them, said Davie, Florida-based legal consultant Joe Ankus.  “I do think some of largest firms in the world will take on a contingency case if they believe at the outset the odds of recovery or settlement justify taking the risk,” he said.  “Twenty-five years ago, that wouldn’t have happened at Am Law 100 firms.  Now, people have adjusted to the new normal.”  The prospect of collecting significant damages against a major corporate defendant — and the possibility of punitive damages — may entice large firms that have historically abstained from contingency cases, he added.

Meanwhile, Skarnulis said he’s seeing traditional plaintiff’s firms — more adept at selecting contingency cases than hourly firms — get involved in contingency business litigation, as well as mid-size firms that specialize in commercial litigation.

The 18-attorney Miami litigation boutique Podhurst Orseck is handling contingency cases related to the pandemic, such as business interruption cases against insurance companies.  “It’s a huge financial and time commitment, putting our resources into claims on a complete risk basis,” partner Steven Marks said in an October interview.  “On the opposite side, if we’re successful, it’s very good for the firm.”

Marks said the firm’s historical contingency revenues make up 70% to 80% of the firm’s total revenue, while comprising about 50% of cases.  Overall, the economic downturn from COVID-19 has accelerated an ongoing trend, paved by personal injury firms, to extend the realm of contingency work, said Ankus.  “If you were to talk to me 25 years ago and say, ‘Joe, how many law firms are doing contingency work?’ I’d have told you none or less than 5%,” he said.  “Today, the number has exponentially increased to where many firms, more often than not, will readily take on a contingency matter.”

Sixth Circuit Sets out Guidelines for Lodestar Fee Awarded in Class Actions

August 22, 2020

Attorney fee awards are a major driver of class action litigation – both in the employment and other contexts.  How they are awarded, and what is “reasonable” has been an ongoing source of contention in many cases.  A recent opinion from the Sixth Circuit provides some guidance and also places limits on methodology used by some courts to support generous, even lavish, fee awards.

The decision in Linneman v. Vita-Mix Corp., Case Nos. 19-3993/4249 (6th Cir., Aug. 12, 2020), related to the settlement of a class action involving the high-end Vita-Mix blenders used commercially and by consumers.  The plaintiffs, who owned the mixers, claimed that a seal used in the blenders was defective and would wear away with use.  The parties settled the case under a two-part structure: Consumers could get either a $70 gift card or a replacement assembly with a revised seal; commercial users would get only the assembly.  As the parties were unable to agree to a fee amount, the settlement provided that class counsel would receive a fee to be determined by the district court.  As explained below, after two years of litigation, and using a lodestar calculation, the district court awarded $3.9 million in fees ($2.2 million plus a 75% premium), and the defendant appealed.

Much of the Court of Appeals’ decision related to the application of the Class Action Fairness Act (CAFA), as it was largely undisputed that the terms of the agreement made the deal a coupon settlement.  The importance to this blog is that the court found that it was appropriate for the trial court to use a lodestar calculation rather than a percentage of the settlement.

With respect to the lodestar calculation, the court made a number of important pronouncements, ruling for the plaintiffs in some instances and for the defendant in others. Among them:

  • In a lodestar calculation, the result (reasonable hours times a reasonable rate) is presumed to be the correct reasonable rate. The court can apply a multiplier (no surprise there), but only in “rare and exceptional” circumstances.
  • A fee award can include the time spent pursuing fees (again, no surprise), but in this case, the defendant had made a reasonable Rule 68 offer of judgment on the amount ($3.1 million), calling into serious question why the fee issue needed to be litigated for another two years.
  • The rates used must be appropriate in the local community, not nationwide.  Thus, the plaintiffs were limited to the relatively lower rates charged in southern Ohio, where the case was pending, and not higher rates charged in other or “national” markets.

The court ultimately remanded the case for numerous reasons and for further determination of the issues noted above, as well as to determine whether the settlement had actually accomplished much for the class members given the steps the defendant had taken prior to the litigation to correct the alleged defect.

The Linneman case is a good example of what can happen when a court actually looks at the amount of work done, the results obtained for the class and whether a fee enhancement is actually in order.  The bottom line: Courts that look closely at what goes into lodestar fee awards in class actions may award less than the plaintiffs expect.

Boston Calls $2.3M Fee Request ‘Beyond The Pale’

August 17, 2020

A recent Law 360 story by Brian Dowling, “Boston Calls Officers’ $2.3M Fee Request ‘Beyond The Pale’” reports that calling the request "beyond the pale," the city of Boston asked a federal judge to pare down a $2.3 million fee bid by Black police officers who won a $484,000 back pay ruling in a long-running discrimination case, citing a litany of issues including "egregiously high" hourly rates.  After being hit with the back pay ruling due to a promotion exam's disparate impact on Black officers, the city attacked the fee request by lawyers from Lichten & Liss-Riordan PC and Fair Work PC.

"The well-settled case law and the facts and circumstances presented by this case lead to the inexorable conclusion that the court should — indeed, must — reduce their requested fees and costs in fundamentally significant ways," the city wrote to U.S. District Judge William G. Young.

A primary contention in the city's opposition is that the officers' inclusion of nearly $1 million in legal fees and costs from an earlier related lawsuit, Lopez v. City of Lawrence.  The police officers have argued that the Lopez case laid the foundation for the success in the present case, Smith et al. v. City of Boston.  The Smith lawsuit focused on promotions from sergeant to lieutenant, whereas the Lopez case related to promotions from patrolman — the entry-level position — to sergeant.  The two tests were similar, but two different judges came to two different conclusions about them.

Saying there's no "legitimate basis" to include billing from the Lopez case, Boston explained that it dealt with "different exams, brought by different plaintiffs against different defendant cities … tried to a different judge, and which the plaintiffs indisputably lost at trial and on appeal."

The city said the entire amount billed from the Lopez case, $977,951.07, should be cut from the fee request.  Boston said further reductions were warranted because the officers failed to gain certification as a class action and the lawsuit fell short in pressing a claim that one of the two tests was discriminatory.

The city also argued the hours billed by the officers' attorneys are "extraordinarily high" and reflect the type of "excessive, redundant billing and overstaffing" that the First Circuit has taken issue with in the past.  Attorneys for the officers accounted for their hours "almost exclusively" using block billing, the practice of lumping together daily time spent on a case rather than itemizing specific tasks done for a client, the city said.

In an unrelated case in April, U.S. District Court Judge Nathaniel M. Gorton slashed nearly $2 million off a $2.7 million attorney fee request due to "pervasive shortcomings" including block billing.   Boston's analysis of Lichten & Liss-Riordan PC founder Harold Lichten's billing records showed many days with a single block of time for multiple tasks or generic tasks "so vague as to be all but meaningless," the city said.

The city also said Lichten failed to keep time records since mid-2015 and proposed cutting his undocumented hours since then from 274 to 137.  In addition to the volume of hours, Boston said the "egregiously high" hourly rates claimed by the attorneys need to be reduced.  The fees pegged the fair market rate for the lawyers who represented the officers at $700 per hour for Lichten and $450 and $350 per hour for the firm's attorneys Benjamin Weber and Zachary Rubin. 

"These rates are simply far above the market rate for lawyers of comparable experience and skill — both for work performed then and now," the city said.  In addition to the specific billing arguments detailed in the city's 23-page opposition, Boston said the court weighing the fee reward "must be mindful that it is limited taxpayer funds, necessary to provide public services, that are at stake."

Hourly Rate Growth Hits All-Time High…Why?

August 15, 2020

A recent Law.com story by Patrick Smith, “Overall Demand Down for Big Law, But Rate Growth Hits All-Time High. Why?,” reports that the overall demand for legal services dropped 5.9% from the same point last year, marking the largest drop in year-over-year quarterly demand since 2009, according to the Q2 peer monitor index from Thomson Reuters.  But within that drop, the average rate billed jumped up 5.2%.

The report, which is a composite index derived from data collected from 160 major law firms in the United States and some international markets, gave the legal industry a score of 51, down six points from the previous quarter’s rating.  For context, the index gave the industry a rating of 65 after three quarters in 2019.

On top of the decline in overall work, the index found that the productivity rating also declined, diving 7.2%.  The significant decline in productivity is likely due to the head count increases over the previous 12 months and not enough work to go around, the report concluded.  

That lack of work can be highlighted by the decline of several major practice areas over the past several months, with real estate (-12.2%), patent litigation (-10.6%), tax (-9.1%), litigation (-7.5%) and corporate (-5.5%) leading the way.  There was one area that the index referenced as showing growth: Bankruptcy is up 6.2%.

But even with those declines across most practices, the worked rate rose. While daily demand per FTE (full-time equivalent) for all lawyers was down 7.1%, partner demand was only down 4.4%, with associates daily demand per FTE down a whopping 9.4%. 

What this means is that overall work is down, but the work that is left is being increasingly done by those at the partner level, and at partner-level rates.   The report supposes this trend to be the result of two primary factors. 

The first is that with less work available, partners are taking up matters that formerly went to associates, effectively becoming the epitome of the “eat what you kill” philosophy.  The partners want to hit their hours and will take the work necessary to do so. 

The other, the report said, is client driven.  Economically strapped clients are coming to outside firms with only their most difficult work, thus necessitating the need for a more experienced hand to guide the ship.  Exit associates, enter partners. 

The end result is a billed-rate growth at an all-time high, a full point higher than in the first quarter of 2020, which for U.S. firms was largely unaffected by the pandemic.   As expected, and to the delight of those who monitor profit margins, expenses for firms were down.  The first quarter of 2020 saw direct expenses growth at about 5%, while Q2 saw only 2.3%. Overhead growth in Q1 was slightly above 4%, while in Q2 it was only up 0.1%.   The report also found that firm expenditures saw a rise in spending  on technology of 4.6%, while money for office space went down 5.6% and the overhead for marketing and business development dropped a whopping 18.5%. 

“These are unprecedented times for the legal industry,” Mike Abbott, vice president of market insights and thought leadership at Thomson Reuters, said in a statement.  “We see law firms making rapid adjustments to better suit the current conditions—investing in productivity-enhancing technologies such as collaborative and remote work solutions, while reducing expenses in other areas such as overhead.  More uncertainty lies ahead in the coming months, but firms are clearly making efforts to improve efficiency and flexibility to deal with what’s to come.”

Sixth Circuit Tosses Hourly Rates Citing ‘Community Market Rule’

August 12, 2020

A recent Law 360 story by Emily Field, “6th Circ. Wipes Out Atty Fee Award in Vita-Mix Blender Deal” reports that the Sixth Circuit vacated a nearly $4 million attorney fees award in a class action settlement over plastic flecks in Vita-Mix Corp. blenders, finding that a lower court used the wrong billing rates to determine the award.  The appeals panel said that in its circuit, a "community market rule" is used to calculate a reasonable billing rate.  Under that rule, the billing rate should not be more than what than what competent lawyers in the relevant community charge.  However, the lower court departed from Cincinnati rates, saying that the practice of law is increasingly more national, according to the opinion.

Attorneys have to show why they deserve to recover fees equivalent to those charged by out-of-town specialists, the panel said.  "And here class counsel would be hard-pressed to make such a showing since they are very much in-town attorneys," the panel said.  "Local lawyers litigating a case in a local courthouse should receive local billing rates.  The district court erred when it concluded otherwise."

The rates used by the lower court were based on both local rates and rates requested by the class counsel, attorneys from Markovits Stock DeMarco LLC, Finney Law Firm LLC and Goldenberg Schneider LPA, according to the opinion.  "As a result, a majority of the attorneys received rates of around $500 per hour and the most senior attorneys received rates exceeding $600 per hour," the panel said.

The appeals court also noted that class counsel attorneys with similar experience levels often requested very different billing rates, with some attorneys with less experience reporting significantly higher rates.  "An attorney with twelve years of experience reported a billing rate $450 per hour, while an attorney from the same law firm with nine years of experience reported a billing rate of $530 per hour," the panel said.  "Neither class counsel nor the district court explained these discrepancies — i.e., by unique expertise or the like."  The panel directed the lower court to recalculate the billing rates.