Alternative Fee Arrangements: Reverse Contingency Fees

In How Many Alternative Fee Arrangements Are There?, we identified five core types of AFAs and a sixth: a hybrid of any of the five. We’ll examine each in a little more depth. Here’s a closer look at Reverse Contingency Fees.

While most attorneys are aware of and have probably performed at least some work on a contingency basis at some point in their careers, there is also a not so common alternative fee arrangement known as a reverse contingency (or reverse contingent) fee that may help add to your firm’s revenue potential. The reverse contingency fee is basically a percentage of the difference between the amount a third party originally demands from your client and the amount that client must ultimately pay the third party, after the settlement or judgement.

That may sound like a mouthful, but the reverse contingency fee may actually be a tool for better aligning the law firm’s interests with those of the clients, in some cases. Assuming the amount in dispute is reasonably determinable, the case has a reasonable probability of success and the savings to your client are real, a percentage based fee might make a lot of sense to your firm.

As an example, let’s say your firm agrees to a reverse contingency arrangement with a client who is potentially exposed to a $1 million liability from a trademark infringement case. Your firm is offering to take 30% of the difference between that and a lower amount that you believe you can settle the case for. If that amount works out to be $300,000, then the firm’s fee would simply be the difference ($700,000) between those two figures times 30% or $210,000.

What client wouldn’t want to pay their attorney only when they perform? At first glance, the reverse contingency fee seems like a good way for an experience attorney, who has navigated this type of case before, to put their money where their mouth is. The catch, as in so many things, lies in preparation and due diligence. Arriving at an accurate benchmark number can be challenging.

In addition to a reasonable assessment of the potential settlement or verdict in question, entering into a reverse contingency fee arrangement means the lawyer must be very careful in disclosing the terms and obtain informed consent from the client, to the fee arrangement. It also means very careful evaluation of the potential amount of the case settlement or verdict. Too high and you’ve made the fee unreasonable. Too low and you may be working for far less than you deserve. Another challenge may include being able to draw from little established procedures or personal experience when negotiating and setting the fee arrangement for a particular case.

All in all, the reverse contingency fee fits well within the spectrum of pay for performance. As such, it may be a valuable tool to earn new business and to generate satisfaction among a percentage of your clients, especially those who have faced similar litigation in the past and have a solid appreciation of the value your work brings to their bottom line.