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Legal Practice Management

Practice Innovations: Large Law Firms Embrace Contingent Fee Litigation

William P. Scarbrough  Executive Director / Varnum, LLP

· 5 minute read

William P. Scarbrough  Executive Director / Varnum, LLP

· 5 minute read

Large law firms have defended their corporate clients from plaintiffs bringing cases on a contingent fee basis for a long time. When the cases have been successful for the plaintiffs, the generally small law firms have made substantial amounts of money. Now, large law firms want part of that action.

For many years, large, prestigious law firms have defended their corporate clients from claims brought by plaintiffs, typically represented by small, upstart law firms on a contingency basis. Big firm defense lawyers often looked down on plaintiff-side counsel for their brash style, swashbuckling tactics, and limited resources. For big firm lawyers, bringing such cases themselves, was certainly beyond the pale.

Now, it turns out that things may not look so bad on the far side of the pale. Boutique litigation firms like Quinn Emmanuel that scaled-up a plaintiff-side practice to dizzying heights of revenue and profitability have long drawn the attention of Big Law. And the attraction of plaintiff-side litigation work has grown in a legal market approaching saturation. Why only defend companies in commercial disputes when you can also bring your own suits, particularly in cases with the potential for large jury awards or settlements? Representing clients on both sides of the “v.” effectively increases the market for litigation work.

A number of entrepreneurial law firms with strong litigation and trial practices have taken this step in recent years, including Varnum, my own Michigan-based law firm. Varnum litigators have handled large-scale and high-profile cases effectively and profitably on behalf of plaintiffs. Contingent fee matters have become a key part of the firm’s litigation practice, which had traditionally been primarily defense-oriented.

This trend is likely to accelerate with the announcement last year by Kirkland & Ellis — the largest law firm in the world based on revenue ($3.76 billion last year) — that it is launching a plaintiff-side trial group. Kirkland has long had a reputation as a litigation powerhouse. The entry of Kirkland into this market communicates clearly to Big Law that the world is safe for handling contingent fee plaintiffs cases.

The Emergence of Litigation Funding

Another factor increasing plaintiff-side contingency fee work by major law firms is the emergence of commercial litigation finance funds. Firms unwilling or unable to risk the investment of their own billable hours and third-party costs — which, over the course of years of a case’s lifespan, can total millions of dollars which could evaporate if the firm loses the case or suffers a disappointing verdict — can now share the financial risk with outside investors. Firms like Kirkland and Varnum invest their own capital in these cases, but other firms getting into contingent fee litigation have turned to outside investors to share some of the risk.

Commercial litigation financing is third-party funding of legal disputes for a single case or a portfolio of related cases. The financing companies provide cash advances to litigants (generally the plaintiff) in exchange for a percentage of the judgment or settlement upon conclusion. The investment is a form of venture capital. Litigation financing reduces the risk to the plaintiffs’ law firm and levels the playing field against large, corporate defendants (and their large law firm counsel).

Firms that become adept at selecting and managing contingent fee cases effectively and that demonstrate a strong return on investment over time, build internal credibility and trust in the practice.

Critics express concern that an outside party with a clear financial interest in the matter can encourage the filing of frivolous suits, exert inappropriate control over the litigation, or offer an unfair advantage in settlement talks. Nevertheless, commercial litigation financing is now a worldwide, multi-billion dollar industry, with several funding companies focused specifically on the US market.

One challenge of integrating a contingent fee practice into a firm accustomed to measuring everything in billable hours and collected fees, particularly for those firms financing the litigation themselves, is how to handle the evaluation and compensation of the partners, associates, and other timekeepers involved in contingent fee cases. The firm’s commitment to contingency as an accepted approach to generating revenue must be complete.

Firms that become adept at selecting and managing contingent fee cases effectively and that demonstrate a strong return on investment over time, build internal credibility and trust in the practice. Rather than penalizing some of the most entrepreneurial lawyers in the firm, contingent fee lawyers should be amply rewarded (particularly if they are successful in securing a windfall for the firm’s partners). A contingent fee practice requires that law firms look beyond the current year in budget planning and compensation decisions.

Incorporating a contingent fee practice into a large law firm, even a firm with a strong litigation practice, is not easy. There are longstanding biases against doing it, not to mention the financial risks and compensation challenges. In today’s increasingly competitive litigation market, however, handling contingency cases on behalf of plaintiffs has become an important competitive advantage for the strong litigation firm. Further, sharing in risk and reward also enhances the attorney-client relationship.

This new trend feels a bit like the Wild West, but this may be how the West is won.