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Big Law Contingency Fees Bring Massive Windfalls, Major Fights

Sept. 23, 2021, 9:31 AM

Welcome back to the Big Law Business column on the changing legal marketplace written by me, Roy Strom. Today, we look at Big Law’s long track record of internal squabbles over contingent fee payments. Sign up to receive this column in your inbox on Thursday mornings.

A giant pile of money sounds great. But at Big Law firms, they often fight over it.

Law firm partners have a long, unfortunate track record of squabbling over contingency fee payouts. This is a good time to talk about it.

A big contingency fee payout loomed large in an article I wrote last week on the sudden removal of Dentons U.S. CEO Mike McNamara. Also, Quinn Emanuel this week was awarded $185 million in contingency fee payments.

One firm is in the midst of a fight over cash, the other is about to get a payout. The circle of life.

Start with Dentons, where it remains unclear what will happen with a $35 million contingency fee earned by a case brought to the firm by ex-partner Jinshu “John” Zhang. Since earning the fee, Zhang has been fired. The person Zhang was negotiating his portion of the fee with, McNamara, has been removed from his position as U.S. CEO.

A simple lesson for law firms and their attorneys is that splitting up a giant pool of cash doesn’t have to be so contentious.

After securing the award, Zhang has said he attempted to negotiate his cut with McNamara. He wanted something around 80% to 90% of the award, according to the two sides. He also said he wanted a position on the Dentons board, over which McNamara had significant sway.

Zhang told me he was less interested in the board position than he was in making a statement about how he perceived firm leadership to play favorites.

Meanwhile, a law firm CEO is tasked with delivering financial results for all partners. Doling out 90% of an eight-figure fee to one person doesn’t go as far, politically, as splitting it up among the broader constituency.

A lot happened between the two sides, and the story is far from over, as Zhang pursues a wrongful termination claim against the firm. But it seems like the money exacerbated an underlying lack of trust. It also highlighted how informal the process can be to determine how to split up such a large fee.

Many Big Law firms don’t do contingency fee work that often. Even if they have some kind of committee to determine contingency fee compensation, it is hard for it to have developed meaningful respect. Like any kind of democratic institution, people have to believe in it for its decisions to be valuable.

Some long-time Dentons lawyers might remember a similar episode that played out at one of its predecessor firms, Sonnenschein Nath & Rosenthal.

A former partner, Douglas Rosenthal, sued the firm in 2005 claiming it had shorted him on more than $8 million from a contingency fee he earned representing the families of victims from the 1988 bombing of a Pan Am flight over Scotland. The case dragged on for years even after a judge awarded Rosenthal more than $3 million in 2008.

Dentons is far from the only firm to have experienced this kind of tension.

Manatt Phelps & Phillips sued a former partner and the law firm he went to, taking with him a case that generated a $10 million contingency fee. Akin Gump was on the receiving end of a lawsuit by a solo lawyer who says the firm shorted him on a referral fee involving a contingency fee case. The examples go on and on, and they show up in almost every conceivable permutation.

Kent Zimmermann, a principal at law firm consultancy Zueghauser Group, said contingency fee windfalls can present a question of survival for some smaller firms. The fear is that partners will not need to work any longer after securing a life-changing fee. For bigger firms, the problem is getting partners to agree on how much to invest in the firm’s future versus reward the lawyers responsible for the money.

“It’s a good problem to have, but it is a problem in a lot of firms when these big fees come in,” he said.

The late Stephen Susman, founder of Susman Godfrey and an expert in contingency fee litigation, spoke in 2019 with Harvard Law School’s David Wilkins about why Big Law firms get into trouble with contingency fees.

His commentary gets to the underlying issue: Big Law partners are used to being paid by the hour. And they don’t look kindly on partners who forego that reliable business model to take a chance on a contingency fee case.

“Other lawyers in the firm get frustrated with their partners who have gotten the firm into these never-ending contingency cases because they’re not seeing any return money,” Susman said. “Those partners that got them involved in the case, now on the outs inside their partnership, leave to go elsewhere. And now the firm is stuck with a case that’s been going on for three years, it’s eaten up a lot of time and money, the partners that brought the case in are no longer even there, and there’s no end in sight. You see that happen quite a bit.”

Contingent fee billing is supposed to be more common in Big Law today, especially with the increased use of litigation funding. I thought litigation funders might be providing advice to Big Law firms on structuring their compensation decisions around contingency fee cases. It doesn’t seem that happens very frequently. Sources at two major litigation funders told me Big Law firms are not interested in that advice.

I asked Quinn Emanuel to discuss how it decides partner compensation in contingency fee cases. The firm declined to comment.

One thing Quinn has working in its favor is it has more experience in litigation and contingency fees than most Big Law firms.

One thing not working in its favor: The industry’s long track record fighting over piles of cash.

Worth Your Time

On Cannabis: My colleague Joyce Cutler reports on the growing number of Big Law firms trying to earn a buck in the cannabis industry. She says notoriously risk-averse firms are warming up to the practice now that 19 states allow recreational use.

On Litigation Finance: Longford Capital says it has closed its third investment fund with a total of $682 million. The firm added about $250 million in fundraising since I reported in January it had raised $434 million.

On In-House Departments: Brian Baxter reports Blizzard Entertainment Inc.’s chief legal officer has left the company amid a scandal at Activision Blizzard Inc., which faces accusations of sexual harassment and discrimination.

That’s it for this week! Thanks for reading and please send me your thoughts, critiques, and tips.

To contact the reporter on this story: Roy Strom in Chicago at rstrom@bloomberglaw.com

To contact the editor responsible for this story: Chris Opfer at copfer@bloomberglaw.com;
John Hughes in Washington at jhughes@bloombergindustry.com

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