In any alternative-fee arrangement in litigation, budgeting should begin by getting as much information as possible from the client about claims, expectations and desired outcomes. “Winning” may not be one of them.
A client may wish to delay the final outcome of a case for political or financial reasons, believing that a continued threat of litigation may yield a settlement. Understanding the client’s objectives is a prerequisite of the budgeting process. The key is not just preparing the budget, but securing client buy-in for the process.
When budgeting for the entire litigation in an alternative-fee arrangement, there should be different budget milestones tied to success. The budget can be for the entire case, or just to that point in the litigation where, if appropriate after a certain amount of discovery, a motion for summary judgment may succeed. The engagement goal is tied to that probability, as with a bonus for staying within budget.
Different parameters define different success outcomes. For example, if the summary judgment motion is successful (even if the full case was budgeted), the client gets out of the lawsuit and the firm gets a success bonus. It is a win-win situation for both the client and the law firm.
Of course, there should be provisions for approaching alternative fees if “success” does not represent a complete victory.
One way to deal with that issue is to use a “success pool” in conjunction with an hourly rate. Under such an arrangement, firm and client jointly determine what percentage of the hourly rate goes into the success pool.
For easy calculation, assume a billing rate of $200 per hour with 15 percent of that rate going into the success pool. Four hours of billing would equate to a success pool of $120. If the firm does not achieve success based on a previously and mutually determined definition, it does not get the pool bonus.
There should be provisions for different degrees of success. Suppose the firm and client initially agree that the case is worth X amount of dollars. If the case is settled for that amount, the firm should receive the success bonus in full. If the firm exceeds expectations and settles the case for 20 percent below the projected amount, the firm would get a percentage bonus above the amount in the pool.
There are success gradients beyond all or nothing. It is absolutely vital that the law firm and client agree on these milestones before the engagement begins.
