In the realm of Big Law, the debate over billing by the hour versus contingency fees persists as firms grapple with the crux of risk and profitability. Traditionally, large corporate firms have thrived on the model of hourly billing, with rates now reaching up to $2,000 per hour, a system that ensures revenue regardless of the outcome of a case. This approach, however, inherently caps returns, limiting them to the number of hours lawyers can feasibly bill in a given period. In an attempt to augment their revenue streams, some Big Law firms, such as Kirkland & Ellis, have ventured into the more unpredictable world of contingency fee cases.
Contingency fees align a lawyer’s financial outcome with the success of their client, offering the potential for substantial rewards should a case succeed. Yet, the inherent risk of losing and, consequently, not receiving payment for years’ worth of work makes many firms hesitant. The risk aversion prevalent in larger firms contrasts sharply with the more flexible business models of smaller trial firms like Susman Godfrey. At Susman, the firm collectively deliberates on potential cases in what is described as a “Wednesday meeting,” where 150 lawyers weigh the risk and rewards of each case.
The cost of not being able to bill multiple lawyers in such discussions is substantial for large firms. For instance, a thousand lawyers meeting for an hour could represent a $1 million opportunity cost, assuming an average hourly rate of $1,000. The potential financial hit from a failed contingency case could be far greater, representing both lost winnings and lost billable hours.
To mitigate these risks, Big Law firms frequently turn to litigation funders. Such funders can provide upfront payments or share the hourly costs, thus reducing the firm’s financial exposure. However, this reliance brings its own drawbacks, as funders typically claim a portion of any awards achieved, thereby decreasing the net gain for the law firm and its clients. As noted by William Farrell of Longford Capital, a litigation funding firm, Big Law has not significantly increased its comfort with risk, largely due to the role of litigation funding in hedging bets.
The cultural and structural transformation required to integrate contingency fee practices into traditionally hourly-oriented firms poses additional challenges. Partners, used to stable compensation models, must adjust to the volatility of contingency-based income. This shift demands a certain adeptness at selecting winning cases — a skillset not as frequently honed within the typical Big Law framework. Charles Agee of Westfleet Advisors acknowledges that firms like Susman Godfrey have a track record and an instinctive edge in identifying viable cases compared to larger firms or purely funding-oriented entities.
For further insights into how contingency and hourly billing impact the legal landscape, Bloomberg Law offers a comprehensive analysis of the ongoing shifts within the industry in their article here.