What Is a Contingency Fee and Why Does It Matter?

If you can’t afford a lawyer out-of-pocket…

…the courts are not necessarily closed to you.

Read this article to learn about the contingency fee arrangement, which is one way that ordinary people without a lot of cash can hire top-notch lawyers.

Background

If there’s one thing that anyone who has any experience with the law can tell you, it’s that a good lawyer can cost an awful lot of money.

As you have probably already gathered, this doesn’t exactly endear attorneys to the general public. On the contrary, it engenders a good deal of grumbling and more than a few lawyer jokes. (We’ve heard them all.)

Why Do Lawyers Cost So Much?

Some people may be under the impression that lawyers are overpaid, or that high legal fees are the result of a scam or some sort of cartel within the profession.

Of course, since we’re in the legal profession, we’re naturally going to be a little bit biased in favor of ourselves. Even so, we hope that you will take us seriously when we say that there is a very good reason why attorneys are paid at the rates they are.

In a market economy, the salaries of all professionals, including lawyers, are determined by market forces. And attorneys’ services are valued so highly because they are performing highly specialized work. No member of the general public, no matter how intelligent, could easily perform the job of an attorney without years or decades of extensive legal training.

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Of course, there have been a few cases of individuals who cannot afford a lawyer studying law on their own and fighting for themselves in court, and sometimes even winning. But these cases are remarkable precisely because they are so rare, and most citizens, when faced with the choice, will choose to outsource their legal advocacy to an attorney.

We accept division of labor all the time in our everyday lives. When we need a house, we outsource the building of the house to a professional builder, rather than spending years learning how to build a house ourselves. When we need medical treatment, we outsource the medical knowledge to a doctor. And when we need legal advocacy, we usually outsource that to a lawyer, rather than doing it ourselves.

And because lawyers’ work is so hard, and in such high demand, they get to charge a lot. So this, in a nutshell, is why lawyers cost so much, and why copper wire was invented by two lawyers fighting over a penny.

(We told you, we’ve heard them all.)

Like it or not, that’s just the way it is. It’s not a perfect system, but it’s better than any other system that has yet been conceived.

Future Attorney Fee Types

So Where Does That Leave Us?

So maybe we’ve convinced you that the high fees that attorneys get paid are an unfortunate necessity. But this might not make the situation any easier for those who find themselves shortchanged by the current system.

Most of us will probably need legal representation at some point in our lives. And if you’re short on money, then you might feel like you’ve gotten the short end of the stick.

At the same time, it often seems like the richest and most privileged members of society can afford the best legal representation, giving them a definite edge in legal matters. So if you’re a citizen with limited resources, going up against a powerful corporation or other entity, this might feel like an especially unfair battle.

In theory, our legal system is blind. The richest and most powerful members of society must be treated equally under the law, and afforded no more privilege than the poorest and most vulnerable.

And by and large, our legal system holds to this ideal. Even Bill Gates, despite all his money and power, was found guilty of violating federal antitrust law in the 2001 case United States v. Microsoft Corporation. Compare this with many third-world countries, where the wealthy and powerful can break the law, and even commit crimes such as rape and murder, with impunity.

But we all know that, even in America, it doesn’t always work this way. If someone like Bill Gates breaks the law, they can still be held accountable. But as a general rule, it is much, much harder, because Bill Gates can afford a team of the best lawyers, whereas any citizen going up against him would have only a fraction of his resources for legal representation.

In other words, the playing field is not level. And many ordinary citizens with legitimate grievances have their voices drowned out in the legal system, precisely because of this problem.

This is especially relevant in our own field of personal injury law, where ordinary citizens who have had the misfortune to be in the wrong place at the wrong time often go up against corporate giants and insurance companies. These organizations have extensive legal resources at their disposal, and they are experts at bullying, tricking, and intimidating ordinary citizens into dropping their cases.

If you have suffered a personal injury, you likely want to hire the best legal representation that you can. But you may believe that such legal representation is beyond your reach, simply because lawyers are so expensive.

As a result, many people who have been in accidents, and need legal representation, never hire a lawyer. Or if they do, they hire a second-rate lawyer, because they believe that they cannot afford the best.

But this is a mistake. In actuality, there are a variety of ways in which ordinary people can challenge big players such as insurance companies and massive corporations, and not bankrupt themselves doing so. One of these ways, as we are about to show you, is the contingency fee arrangement.

The Contingency Fee Arrangement

Contingency Fee Explained

What Is a Contingency Fee Arrangement?

The contingency fee arrangement is a form of alternative payment plan which is commonly used by personal injury lawyers.

Here’s how it works: the lawyer takes your case for free. You don’t have to pay anything out-of-pocket. Your attorney will do all the work for you, including negotiating with the other parties involved, drafting legal briefs, speaking to witnesses, and even taking the case to court if necessary. You may even get free medical treatment or cash advances.

So what’s in it for the attorney? If you win the case, they will take an agreed-upon percentage of your judgment or settlement to cover their legal fees. Typically, this is set at around 33% of the final cash award, although it may be higher if the case goes to trial.

How much do you have to pay if you lose the case?

Nothing.

Under a contingency fee arrangement, you only pay if you win, and if you lose, the attorney swallows all the legal fees and you don’t pay a dime.

As you can see, the contingency fee arrangement goes a long way to solving the problem of the unfair legal playing field. It allows ordinary people, who may not have very many resources at their disposal, to have access to top-notch lawyers without going deeply into debt. No matter how rich or poor you are, you can have your day in court.

Now, you might be starting to think that contingency fee arrangements sound too good to be true, and that there must be a catch somewhere. After all, taking a case with no guarantee of compensation is a big risk for an attorney. If they lose, they might end up wasting months or years of time and energy. So why would any lawyer do it?

But if done correctly, contingency fee arrangements are a good deal for the lawyer as well. Lawyers who operate on a contingency fee basis usually take on a high number of cases, and are confident in their ability to win a large percentage of these cases. Even if they lose some, they can still win enough to make a consistent profit.

Also, contingency fee arrangements gives lawyers access to all sorts of cases that they might otherwise be unable to sign. Some clients might be too poor to afford a lawyer, but their cases might still have the potential to yield a substantial settlement. Lawyers who operate on an hourly basis might miss out on a lot of these potentially lucrative cases.

Finally, but not least importantly, some lawyers operate on a contingency fee basis out of a sense of ethical duty, and a commitment to stand up for the “little guy.”

All told, it’s not hard to see why many lawyers choose to operate in this way, rather than with an hourly payment plan.

What Type of Attorneys Use Contingency Fees?

Who Offers Contingency Fee Arrangements?

Contingency fee arrangements are often a wonderful opportunity for the client, but not all lawyers offer them. Typically, this tends to be based on what area of law the lawyer is operating within. In some legal fields, it is easy to operate on a contingency fee basis, and in others, it it downright impossible (if not explicitly forbidden).

  1. Contingency fees are most common in our field of personal injury law. In fact, most personal injury lawyers operate in this way. If you know what you are doing as a P.I. lawyer, it is relatively easy to set your firm up along these lines, and still make a lot of money.
  2. Contingency fees are also common in employment or debt collection law, although there are not used in these fields as frequently as they are in personal injury law.
  3. For other types of law, such as business or family law, you won’t be able to get a contingency fee arrangement. And contingency fees are typically banned in criminal law. Not to mention that they are pretty much impossible, because there is no “award” to be gained.  (Of course, if you are accused of a crime, you are always entitled to legal representation, as we mention below. But you won’t be able to get a criminal defense lawyer on a contingency fee.)
  4. Here, we should address one important matter: Contingency fee arrangements can only be used by the plaintiff in a personal injury case. It is impossible for the defendant to use a contingency fee arrangement, because the lawyer’s job is to keep the client from losing money, rather than to help them recover damages. For a civil defense attorney, there’s nothing from which to draw the contingency fee.

(Actually, if you want to be precise, this isn’t strictly true. There are a few creative ways in which defense attorneys can work out arrangements similar to the contingency fee. For instance, they might take a contingency fee from the portion of money that they save the client, calculated by the difference between the amount the plaintiff was seeking and the amount the defense attorney actually settled the case for. But this type of arrangement is not nearly as common as the straight contingency fee for plaintiffs.)

But even within the fields where contingency fees are most commonly used, not every case will be taken on a contingency fee. Here are a few guidelines on the sort of cases that lawyers are most likely to take on contingency fees:

  1. Because each contingency fee case is a “bet” for the lawyer who takes it, they are more likely to take less risky cases. The more iffy your case is, the less chance you have of finding a lawyer willing to make a contingency fee arrangement with you.
  2. Contingency fee lawyers are also more likely to take big cases than small cases. If they take a case which is too small, then it may end up being a loss for them, because they will have to put a lot of time into the case and get only a small reward in the end.
  3. Following from the above point, if there are no legal limits on the amount of damages that can be recovered in a particular area of law (i.e. if there are no tort reform measures), then the chances of finding a contingency fee lawyer are increased.

Retainer fee and contingency fee difference

What Are the Benefits and Drawbacks of Contingency Fee Arrangements?

Contingency fees have a lot of benefits for clients. But they aren’t a complete walk in the park, and there are some potential drawbacks to consider. Before signing a contingency fee arrangement, you should be aware of what you are getting into.

Benefits:

  1. The most obvious benefit of a contingency fee arrangement is that you have to pay nothing out-of-pocket. This makes contingency fee lawyers accessible to absolutely anyone, at any income level, within our society, and helps level the playing field in personal injury law.
  2. Because the lawyer’s paycheck in a contingency fee arrangement is directly tied to the size of the size of the settlement, this gives the lawyer a direct financial incentive to get you the biggest possible judgment or settlement that they can possibly get. As a result, such lawyers are more likely to go the “extra mile” for you and ensure that you recover the maximum amount of damages available to you.
  3. Contingency fee arrangements also incentivize lawyers to try and settle the case reasonably quickly. Lawyers who are paid by the hour have the perverse incentive to drag the case out as long as possible. But if your lawyer operates on a contingency fee basis, he or she has the opposite incentive: to get the best outcome in the shortest amount of time.
  4. To some clients, one of the best things about a contingency fee arrangement is peace of mind. This might sound a bit spacey and nebulous. But if you’ve been in an accident, your pain and fear is all too real. This may be one of the worst times in your life, and the last thing you need is to worry about money. A contingency fee arrangement takes the issue of money off the table, at least for the short term, and allows you to focus your emotional energies on your recovery. This will have a profoundly positive effect on your long-term health.

Drawbacks:

  1. You aren’t getting free legal representation. If you win, you will still have to pay for the case later, out of your settlement. In fact, a contingency fee lawyer may end up costing just as much as an hourly lawyer (although you still won’t have to pay out of pocket, which might make a lot of difference in and of itself).
  2. If you’re signing a contingency fee agreement, you already know this, but sometimes it doesn’t fully sink in until you get the settlement check and it’s smaller than you might have been imagining. So be prepared for that!
  3. Although the lawyer in a contingency fee arrangement will typically cover all attorney’s fees, there may be some additional costs you need to cover. So before signing a contingency fee agreement, make sure you’ve read all the fine print, and that you know what it covers and what it doesn’t cover.
  4. Because each contingency fee case is a big risk for a lawyer, you might have trouble finding a lawyer who will help you, especially if it’s less clear that you have a strong case. Every lawyer’s risk assessment will be a little different, so this doesn’t necessarily prevent you from getting a contingency fee arrangement if your case is a bit more shaky, but it does mean that you may need to do a bit of shopping, and you may even have to pay a higher fee.

Reza Torkzadeh - Lawyer

Other Types of Fee Arrangements

Of course, not all lawyers operate on a contingency fee basis. So here’s a quick guide to some of the other ways in which lawyers might bill you.

Hourly Rates

An hourly rate is the most common way of paying a lawyer, as well as the simplest to understand. You simply pay the lawyer a set fee for every hour of work they do on your case.

How much do lawyers charge? It depends on a lot of factors. Of course, better lawyers and lawyers in fields with higher demand for legal representation can charge more.

Location also matters. Lawyers in big cities, or areas with higher costs of living, tend to charge higher rates. Some lawyers also charge different rates for different kinds of work. An hour spent in court, for instance, might cost more than an hour spent filing paperwork or traveling.

Typically, though, even the cheapest lawyers cost over $100 an hour, and in most cases, quality lawyers charge significantly higher. The most expensive lawyers can charge several hundred dollars an hour, or even over a thousand.

These prices might sound crazy, but remember that, like all wages, they are determined by market forces. If a lawyer is able to charge an exorbitant amount, it is likely because their service is worth that amount.

Lawyers who cost more are typically better at what they do, and more likely to resolve your case quickly and favorably. An expensive lawyer might even end up costing less than a cheap lawyer in the long run, if they can settle things faster or get you a more favorable settlement!

Of course, this isn’t always true, and some lawyers do overcharge. There are situations where a cheaper lawyer really is a better deal. The right choice for you will vary depending on your circumstances and the precise nature of your legal problem.

Retainer Fees

Most attorneys who operate on an hourly rate ask for a retainer fee from their clients. A retainer fee is still billed according to an hourly rate, with the difference being that the client pays before the attorney begins to work on the case.

Before the case begins, the client deposits a certain amount of money in a special account. This is the retainer fee. As the attorney works on the case, they take money out of the retainer fee, in accordance with the tasks they perform. They can “dip into” the fee whenever necessary, and if it runs out, then the client can pay the attorney a new retainer.

Retainer fees make sure that an attorney will have money immediately available to fund any legal work they do. They are meant to be flexible for the attorney, but they also provide a degree of certainty, and save the client from having to make a lot of small payments.

What if the case is concluded before the attorney exhausts the retainer fee? Well, in most cases, retainer fees are nonrefundable, which means you won’t get back what you invested into the retainer, even if there is some left over.

However, most state bar associations require attorneys to ask for a retainer fee based on a reasonable estimate of how much the case is expected to cost. If the attorney charges an unreasonable fee which is far more than he or she actually ended up spending on the case, you might be able to petition to get your money back.

Flat Fees

Under a flat fee arrangement, the lawyer charges the client a specific fee for taking a certain case or performing a certain task, regardless of how many hours the attorney spends on the case. The client pays up front, and knows what they will be getting from start to finish.

As you might imagine, most lawyers who deal with complex, multifaceted cases don’t charge flat fees. These are reserved for simple and straightforward types of cases, such as wills or simple bankruptcies, where the attorney has a very good idea of what to expect in terms of time and effort.

Be careful with flat fees, though! You might think that the fee includes everything, but there might be some additional costs of the case which are not covered by the flat fee. So before agreeing to a flat fee, make sure you know exactly what you’re getting.

Capped Fees

A capped fee arrangement is similar to an hourly fee arrangement. There is one major difference: the attorney and client agree to cap the total fees at a certain amount, and not exceed that amount.

This gives clients a degree of certainty, but it can be risky for lawyers in bigger cases, and so it is typically only used where the outcome of a case is not too unpredictable. An attorney may also offer a soft cap agreement, which can be altered during the case if certain agreed-upon conditions come to pass.

Holdback

A holdback fee arrangement is sort of a cross between an hourly rate and a contingency fee arrangement. Under this arrangement, a law firm has an hourly rate, but the client only pays part of this rate. They pay the rest later, if they are satisfied with the outcome of the case.

A holdback fee arrangement might be seen as “the best of both worlds.” This gives attorneys the certainty of some financial reward for taking the case, but also gives them a further incentive to do a good job.

Alternatively, one might see a holdback arrangement as the worst of both worlds: it’s beyond the abilities of most lower income clients to pay, and it is still a risk for the attorney. Whether or not you choose to accept such an arrangement is up to you.

Pro Bono Representation

In rare cases, you may be able to find a lawyer who is willing to represent you for free (pro bono).

Pro Bono comes from a Latin term meaning “for the public good,” and this sort of legal work is typically done by lawyers with a strong sense of morality and social responsibility. If a lawyer believes very strongly in helping a certain person or group, or promoting a particular cause, then they may be willing to take a case at no charge.

According to the American Bar Association’s Model Rules of Professional Conduct, every lawyer is required to do 50 hours of pro bono work a year, and some lawyers are also required to do pro bono work before receiving legal certification.

However, most attorneys don’t do pro bono work on a regular basis, simply because they don’t have a choice: like you, they have to earn a paycheck. If you want to be represented pro bono, you have to find an attorney who is passionate about a case and in a financial position where they can afford to take it for free.

As you might imagine, this makes it hard to find a pro bono lawyer, and you shouldn’t expect to find one easily, especially if you have a difficult or time-consuming case. However, some state bar associations have organizations of pro bono lawyers who devote part of their time to helping the needy.

If you are in desperate need of a lawyer, but have absolutely no way of hiring one, then this may be an option worth looking into.

REMEMBER: This only applies to civil law. If you are the defendant in a criminal case, then you are always entitled to legal representation. If you cannot afford a private criminal defense attorney, then the court is required to appoint you a public defender. The right to an attorney is enshrined in the Sixth Amendment to the Constitution, and further guaranteed by the Supreme Court in the case Gideon V. Wainwright. So don’t let anyone deny you your rights in the criminal justice system, and always demand a lawyer.

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Other Fees Associated with Hiring an Attorney

Consultation Fee

The consultation is the initial meeting with the lawyer, where you tell them the basics of your case and find out whether they’ll be able to help you. Many lawyers offer a consultation for free (and if you are talking to a contingency fee lawyer, you will almost certainly get a free consultation). However, some do not, and if you go in to talk to an attorney for an initial consultation, find out whether this is the case!

You don’t want to be slapped with a $200 (or even higher) fee without warning.

Referral Fee

Sometimes, attorneys refer cases to each other. This is pretty common, because each attorney’s strengths are somewhat different, and lawyers (just like any other professionals) tend to network with each other. When this happens, the attorney who refers the case may charge the second attorney a referral fee.

Referral fees are a somewhat controversial practice. After all, if lawyers refer cases to each other based on who can pay the best referral fee rather than based on which lawyer is best for the case, this might end up leaving a client with substandard representation.

State bar associations tend to take these sorts of ethical issues very seriously, and so there are strict guidelines in place surrounding the practice of offering referral fees. You have every right to know if you are being referred to a lawyer who is paying a referral fee, and to choose whether to consent to the referral fee agreement.

Final Thoughts

The contingency fee arrangement, like other types of alternative fee arrangements, does a lot to level the legal playing field. If you are in need of a lawyer, but do not want to pay high legal fees out of pocket, a contingency fee arrangement might be your best bet.

Of course, no fee arrangement is perfect, and even contingency fee arrangements have the potential to go badly wrong if you end up with an unscrupulous or untrustworthy lawyer. This is why you should put a lot of thought into the process of hiring a lawyer, and make sure you can get someone that is right for you, regardless of the fee arrangement.

After all, if a lawyer is going to be taking one third or more of the money that you win in a case, you deserve nothing short of the absolute best.


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