You may recall Blawgletter's thoughts on "How to Negotiate a Reverse Contingent Fee". We said:
The [reverse contingent fee] agreement with the client calculates the RCF as a percentage of the savings off of a benchmark number. The benchmark reflects an estimate of the client's possible exposure.
By way of example, if the law firm and client agree that a patent infringement case exposes the client to potential liability of $10 million, the RCF would equal a percentage — 40 percent, say — of the difference between $10 million and any lower amount that the client pays in settlement or as a result of a judgment. If we zero out the plaintiff, our fee totals $4 million — .4 x ($10 million – $0) = $4 million.
You can also base an RCF on achieving goals — such as winning a motion to dismiss or for summary judgment. And you can use a multiplier of hourly fees to compute the premium.
The ex-CEO and COO of PRC, LLC, did just that. Wesley T. O'Brien hired three different law firms to represent him in connection with an arbitration and litigation arising from claims that he defrauded and breached fiduciary duties to PRC. O'Brien won. And then he sought to recover his defense costs from PRC and its parent, IAC/InterActive Corporation, under an Indemnification Agreement and a Merger Agreement.
O'Brien had agreed to pay two of the firms a 20 percent premium on top of their hourly fees if O'Brien prevailed. He contracted with a third firm to remit a 100 percent bonus. Vice Chancellor Parsons, in the Delaware Court of Chancery, had to decide the indemnitors had a duty to pay not only the hourly fees but also the "success" fees.
The court held that the indemnitors did, indeed, have such an obligation. Although O'Brien had in fact paid only a fraction of the fees he agreed to, the court ruled, he had "actually incurred" them "because he was obliged to pay that amount". The court also rejected the indemnitors' argument that "a modest success premium is per se unreasonable in the case of officers and directors seeking indemnification from their corporations."
The Vice Chancellor allowed the 20 percent reverse contingent fees but cut the 100 percent premium for the third firm to 50 percent. O'Brien v. IAC/InterActive Corp., No. 3892-VCP (Del. Chanc. Aug. 27, 2010)
Why would a client agree to a reverse contingent fee? Most often to save cash, especially if the client doesn't have funds to pay hourly. As with a regular contingent fee, the reverse variety allows the client to retain capable counsel and align the lawyers' interests with those of the client.