Lawyers’ $2,000 Hourly Rates Crimp Big Law’s Appetite for Risk

Welcome back to the Big Law Business column. I’m Roy Strom, and today we look at why large firms are reluctant to take on contingency fee cases. Sign up to receive this column in your Inbox on Thursday mornings.

Big Law litigators have a great business model. They bill by the hour, and they collect fees whether their clients win or lose.

A possible downside is that their returns are capped by the number of hours they can work.

To boost their returns, and to keep pace with the surging profitability of major corporate practices, a handful of large firms have delved deeper into contingency fee cases. Kirkland & Ellis is one prominent example. The firm has taken on more plaintiff-side work since announcing its entrance into that business five years ago.

By representing plaintiffs and getting a potential reward for winning the case, Big Law firms can juice their litigation revenue. But taking risk is not Big Law’s strong suit.

On that front, firms looking to enter the plaintiff-side practice could take some cues from their more risk-tolerant counterparts at smaller trial firms such as Susman Godfrey.

Earlier this week, I wrote a story about a tough room: the Wednesday meeting where Susman Godfrey partners pitch colleagues on cases they believe are worth the firm’s time and money. The meeting is where the collective wisdom of about 150 lawyers decides.

That meeting is a luxury that Big Law litigation shops just don’t have. Getting hundreds, or in some cases a thousand, lawyers together to talk about a single case just isn’t a good use of their time—especially when many of them could be billing $2,000 an hour.

That’s a big opportunity cost. A thousand litigators sitting in a room for just one hour could cost a law firm $1 million in lost work, assuming the average hourly rate for those lawyers was a mere $1,000.

Now, think about the potential lost revenue for a firm that spends two or three years working on a contingency fee case that loses. It’s massive. The firm is not just out the millions of dollars they could have won. They’re out the millions in fees they could have billed to an hourly client.

“That’s tangible for them,” said Kalpana Srinivasan, managing partner at Susman. “For us, it’s more about what are the other matters we could have pursued? Because we’re not thinking about hourly time as our baseline to begin with. It’s just a little bit of a different mentality.”

To solve for that opportunity cost, larger firms have often turned to litigation funders. Funders can pay some of the law firm’s fees upfront or on an hourly basis, taking some of the risk off the table. Returns for funders can take a chunk of the award away from clients.

“They’re trying to figure out how to offer those contingency fees,” said William Farrell, a cofounder of litigation funder Longford Capital, which has worked with Susman.

“One way is to look at their smaller competitors like Susman and learn to offer contingencies,” he said. “Another way to do it is to lean on funders like Longford to help them effectively offer contingencies without having to shoulder the full risk.”

Even as they add contingency cases, most of the largest firms have not gotten more comfortable with the risks involved, Farrell said. Many large firms have something like 5% of their work-in-progress, known as WIP, dedicated to true contingency fee matters, he said. Some firms have tried to reduce that figure even lower by laying some of the risk on funders.

“Have those firms been trending towards more risk tolerance? The answer is no,” Farrell said. “Part of the reason is because of litigation funding.”

Another challenge is compensation.

Plugging a risk-based contingency fee practice into a mainly hourly firm is a tricky task. Most Big Law partners are used to receiving fairly stable, and growing, compensation every year. Contingency fee cases generate revenue in lumps, and partners would have to be comfortable with leaner years.

“Maybe it’s partnership dynamics or political dynamics that make that impossible,” said Charles Agee, chief executive officer at litigation finance advisory firm Westfleet Advisors. “Because I don’t know of firms that are doing that.”

Firms also must believe in their ability to pick winners. And that’s a muscle they haven’t flexed as often as risk-taking firms like Susman or litigation funders. If you’re going to bet on yourself, you have to pick winners.

“I’d bet any amount of money that Susman has a better track record at picking successful cases than any litigation funder,” Agee said.

Worth Your Time

On Litigation Funding: Emily Siegel reports on the litigation funding business at Fortress Investment Group, taking an inside look at the firm that’s battled to the top of the industry.

On Attorney’s Fees: A federal judge cut in half Quinn Emanuel’s massive fee for work on a lawsuit by health insurers, reducing the firm’s take to $92.4 million. The previous award, roughly $185 million, had amounted to 5% of the billions in damages the firm won for its clients.

On Firm Partnerships: Cleary Gottlieb will start naming non-equity partners, following rivals that use the classification to retain top associate talent. The firm says the move will help retain lawyers.

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