Keys to the court house 

The contingent-fee option enables a claimant who has a valuable claim but can't afford hourly fees to hire a lawyer. He pays with a promise to share his recovery with the lawyer in return for the lawyer's sharing the many risks of pursuing a claim — including the risk of losing (or winning too little), of not collecting from the defendant, and of the effort's costing a lot more than you expected. 

People with plenty of money can agree to pay on contingent-fee basis, too — and they often do.

A client that won't abide by the contingent-fee agreement represents another kind of danger for the lawyer. A recent decision by the Fifth Circuit will help keep that danger in check, to the benefit of almost everyone.

Family fight

The case that produced the ruling arose from disputes over the fortune of Texas oil legend H. L. Hunt.

Hunt's great-grandson Al Hill, III, and his wife Erin engaged two law firms to represent them in more than a dozen lawsuits. The cases concerned the Hills' claims to assets of two trusts that H. L. Hunt and his wife had set up during the 1930s in the name of their daughter Margaret, who later married Al Hill, Sr., and Haroldson, the oldest son.

The Hills agreed in the engagement letters to pay the law firms full hourly rates for all of their work plus 15 percent of the Hills' "Gross Recovery". But because the Hills did not have the means to pay the hourly fees on a current basis, the contracts allowed them to defer payment until "financially practicable".

Fee fight

A year later, the law firms asked the Hills to pay $3.2 million for their hourly work. The Hills refused. They then fired the firms, which in turn brought arbitration against the Hills under the fee contracts. 

The trust lawsuits at length settled on a basis that yielded $188 million to the Hills.

An arbitration panel heard evidence on the law firms' fee claim for nine days. The panel rejected the Hills' "unconscionability" defense, among others, and awarded the firms their full fees — $3.2 million for the hourly component and a little more than $25 million for the contingent-fee part.

But when the firms asked the U.S. District Court in Dallas to confirm the award, it refused. The court ruled that Texas ethical rules would deem collecting an hourly fee plus a contingent one unconscionable:

In plain language, this is not simply a contract that was ill-advised when signed, but it is one in which Plaintiffs will receive something for nothing. The contingency fee is a guaranteed fifteen percent payment, on top of the generous hourly rate, for no additional work or risk of nonpayment. The court finds this type of contingency fee particularly troublesome and contrary to well-established Texas precedent. The contingency fee provision therefore results in a windfall that Texas public policy cannot countenance.

Campbell, Harrison & Dagley, L.L.P. v. Hill, No. 3:12–CV–4599–L, 2014 WL 2207211, at *13 (N.D. Tex. May 28, 2014).

The law firms appealed.

Fifth Circuit upholds fee agreement

Reversing, the Fifth Circuit reinstated the arbitration award. Campbell, Harrison & Dagley, L.L.P. v. Hill, 782 F3d 240 (5th Cir. 2015). It held:

The district court misapplied that standard. In particular, it rejected the arbitrators' determination that “the prospect of recovery [was] plenty uncertain”, finding instead that “[t]here was nothing contingent about [the firms'] recovery of their attorneys' fees”. . . . The court specifically rejected the total-fee amount based on its inclusion of the contingency-fee portion. As the court interpreted the fee agreement, the contingency fee constituted an “unearned payment” in the light of the non-contingent nature of the hourly-rate fees, and, as a result, made the fee agreement unconscionable. . . .

 

The arbitrators, on the other hand, specifically determined: recovery of any fees was uncertain; a reasonable attorney could find the fee arrangement reasonable; and the total fee was not unconscionable. (“There is nothing about a relatively high hourly rate schedule, uncertain to time of payment, and/or a relatively low contingent percentage, when the prospect of recovery is plenty uncertain, that should be offensive to a competent lawyer, a reasonable client, or an overall traditional public policy of fairness.”). This determination likewise comports with the plain language of the fee agreement, which allows for payment of the hourly-rate fees “as soon as is financially practicable ”. (Emphasis added.)

 

In rejecting the arbitrators' determinations regarding the uncertainty of recovery, the reasonableness of the total fee, and unconscionability, the court “substitute[d] [its] judgment for that of the arbitrators merely because [it] would have reached a different decision”. . . . As a result, it erred in vacating the contingency-fee-portion of the award and related awards (for the arbitration, the firms' attorney's fees, other fees, expenses, and arbitrators' compensation; and pre-judgment interest on the contingency-fee portion).

Campbell, Harrison & Dagley, L.L.P., 782 F.3d at 245-46 (citations omitted).

Significance

The outcome enhances confidence in contingent-fee agreements and therefore lowers the collection risk that law firms face when entering into contingent-fee arrangements with clients.

That should save clients who live up to their contracts money. Lower risk of collection will translate into contingent-fee percentages that reflect a premium for sharing risk of recovery on the client's claim but do not build in an additional premium for the lawyer's risk of enforcing the fee deal.

Everybody wins. Except of course the defendant.