Introduction

The concept of litigation funding has gained significant traction, particularly as third-party funders become more prevalent. However, an often-overlooked aspect of litigation funding is the role played by law firms themselves when they engage in contingency fee arrangements with clients. Under a contingency agreement, law firms essentially act as funders of litigation by providing legal services with the expectation of receiving a portion of the judgment or settlement if the case is successful. This article explores how law firms function as litigation funders through contingency fee agreements, the benefits and challenges associated with such arrangements, and their impact on access to justice.

Understanding Contingency Fee Arrangements

A contingency fee arrangement is a type of legal fee structure where a lawyer agrees to represent a client without upfront payment, instead receiving a percentage of the financial recovery from the lawsuit. This arrangement is common in civil litigation, such as personal injury cases, class actions, patent litigation and other types of civil litigation where the plaintiff seeks monetary compensation.

1. Structure and Purpose: The primary purpose of contingency fee arrangements is to align the interests of the lawyer and the client when the client cannot pay an hourly rate for representation. While lawyers are always supposed to seek the best results for their clients, in a contingency arrangement, the lawyer is incentivized to achieve the best possible outcome, as their compensation depends on the success of the case. This structure also opens the doors of the legal system to individuals and entities who might not afford to pay a lawyer upfront.  In short, a contingent fee arrangement opens the door to the courthouse for many prospective clients that might otherwise be denied access to the court because they cannot afford the attorneys' fees. This is especially true in cases where the costs are extremely high, such as patent infringement lawsuits.
2. Percentage and Recovery: Typically, the lawyer's fee is set as a percentage of the recovery, often ranging from 30% to 45%,depending on whether the agreement is a full or partial contingency agreement. In a full contingency agreement, if there is no recovery from the case, the lawyer receives no fee, but the client is not charged anything. In a full contingency arrangement, the lawyer and law firm assume the risk of no recovery and for paying both the expenses and the attorneys' fees/salary for the lawyers working on the case.

Law Firms as Litigation Funders

When law firms agree to contingency fee arrangements, they effectively take on the role of litigation funders. This is because they invest time, resources, and expertise into the case without any guarantee of payment, exactly how third-party litigation funders operate.

1. Risk Assumption: In a full contingency arrangement, the law firm assumes significant financial risk. It covers all costs associated with the case, including court fees, expert witness fees, attorneys' fees and other expenses, with the expectation that it will be reimbursed from the case proceeds. This risk assumption is akin to the investment made by third-party funders.
2. Resource Allocation: Law firms allocate substantial resources to contingency cases, including the time and payment for attorneys, paralegals, and support staff. They also utilize their networks to gather evidence, engage experts, and build a compelling case. This resource allocation underscores their role as litigation funders who provide the necessary capital and expertise to pursue the litigation.

Benefits of Contingency Fee Arrangements

Contingency fee arrangements offer several benefits, both for plaintiffs and the broader legal system.

1. Access to Justice: One of the most significant advantages is enhanced access to justice. Many individuals who have valid legal claims are unable to pursue them due to financial constraints. Contingency arrangements allow such individuals to obtain legal representation without upfront costs, ensuring that justice is not limited to those with financial means.

This is especially true in the areas of law where case costs are extreme, such as patent infringement litigation.  The AIPLA Economic Survey for 2023, when this lawsuit was filed, states that when damages are less than $1 million, the costs of suit per patent for simple technologies is $300,000 through discovery and claim construction, and another $600,000 per patent to take the case through trial and appeal.[1]  When the damages are between $1 million and $10 million, those numbers increase to $600,000 and $1 million per patent, respectively.  Where the damages alleged are between $10 million and $25 million, those numbers increase to $1.5 million and $3 million per patent, respectively.  Where damages alleged exceed $25 million, those numbers further increase to $1.5 and $3.625 million per patent.  The report adds that for complex technologies, these reported costs can increase by up to 50%.[2]  For many, if not most, patent owners, such costs are far beyond their means.  Only through litigation funding, whether law firm contingency arrangements, third party funding, or some hybrid, is access to the courthouse made available to most patent owners.  

2. Incentive Alignment: While a lawyer is always motivated to secure the best outcome for their client, a contingency relationship is efficient in that it is unlikely a lawyer would take a meritless case on a contingent basis.  Therefore, a contingent relationship can increase the likelihood that the case has merit.
3. Efficient Case Management: Lawyers working on a contingency basis are incentivized to manage cases efficiently and effectively. They are more likely to focus on cases with strong merits and the potential for favorable outcomes, filtering out weaker claims that might not justify the investment of time and resources.

Challenges and Criticisms

Despite their benefits, contingency fee arrangements also present challenges and criticisms.

1. Financial Pressure: The financial pressure on law firms can be significant, especially in complex cases that require substantial resources and time. If a case is lost, the firm may face financial strain, which can impact its ability to take on future cases.  In many cases, the law firms will seek funding support from a third party to offset the high costs, especially in high-cost cases, such as patent litigation.
2. Potential Conflicts of Interest: While contingency arrangements align lawyer-client interests, they can also lead to potential conflicts. Law firms might be tempted to settle cases prematurely to secure a fee, potentially compromising the client's interest in pursuing a more favorable outcome through trial.  This is especially true as cases progress through discovery and a law firm may learn information that is not available to the client, such as attorneys' eyes-only material.
3. Limited Case Selection: Law firms may be selective in choosing cases based on their potential for success and financial recovery. This selectivity can leave some plaintiffs with valid claims without representation if their cases are deemed too risky or unlikely to result in significant compensation.  This is especially true as cases progress through discovery and a law firm may learn information that is not available to the client, such as attorneys' eyes-only material.  It would not be surprising that a law firm may learn a particular cause of action against a defendant is valid after receiving attorneys' eyes-only material through discovery and decide to allocate further resources for the case.  As well, it would not be surprising that a law firm may learn a particular cause of action against a defendant is weak after receiving attorneys' eyes-only material through discovery and decide not to allocate further resources for the case.

Impact on Access to Justice

The role of law firms as litigation funders through contingency fee arrangements has a profound impact on access to justice.

1. Empowering Plaintiffs: By removing the financial barrier to legal representation, contingency arrangements empower clients to pursue their claims. This empowerment is particularly important in patent infringement cases where costs are extremely high and personal injury cases where clients are facing physical and financial hardship.
2. Deterrence of Wrongful Conduct: The ability to bring lawsuits without upfront costs serves as a deterrent to a defendant's wrongful conduct.
3. Excessive Litigation: Critics contend that the availability of contingency arrangements may encourage frivolous lawsuits, as clients have little to lose financially. However, the rigorous case evaluation process typically serves as a safeguard against this issue.
4. Fee Concerns: The percentage-based fee structure can result in substantial payouts for law firms, particularly in high-value cases. While this reflects the risk undertaken by the firm, it raises questions about the fairness of the compensation relative to the work performed.

Conclusion

Law firms operating on a contingency basis function as de facto litigation funders, providing crucial support to plaintiffs who might otherwise be unable to pursue legal claims. By enhancing access to justice, aligning incentives, and managing litigation risks, these firms play a vital role in the legal system.

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Ramey LLP is a full-service litigation law firm working with a national client base from our Houston, Texas office. We are dedicated to enhancing client results through efficient practice management, innovative technologies and the use of skilled professionals.