Risk KnobPrologue

A story from a long-ago summer day highlights the big rewards that you can earn from taking purposeful risks.

In a little over a month, on August 5, 2015, 151 years will have passed since a commander took a gamble during the Battle of Mobile Bay.

The commander knew that the defenders had rigged 67 subsurface mines across most of the Bay’s mouth. Heavy guns guarded the remaining patch of open water.

As his attack began that morning, one of his vessels struck a mine — a torpedo — and sank within minutes. He expected that other mines likely lay in his flagship’s path. But he bet that they would either miss his hull or prove duds.

He shouted to Captain Percival Drayton: “Damn the torpedoes, full speed ahead!”

And David Farragut‘s side won the battle, captured Mobile Bay, and secured the resulting benefits for the Union.

Fortune favors the bold

The idea of taking risks to win rewards works for lawyers, too — and nowhere does it work as purely and as well as in the context of contingent fees.

In two earlier posts, I wrote, respectively, about the plusses and minuses of the hourly fee — which concentrates almost all risk on the client —  and the goods and bads of flat fees — which shift some of the “procedural” risk to the lawyers but none of the risk of losing on the merits.

The transfer of risk in the flat-fee context matters, I maintain, because it gives lawyers more control over things they can influence, aligns lawyer and client interests in avoiding unproductive work, and offers the lawyers a chance to earn a worthwhile reward for successfully managing procedural risks.

The third major way to structure a business client’s engagement of a law firm moves even more risk from the client to the firm in return for a share of the upside. In many cases, the contingent fee enables clients to bring claims they couldn’t afford to prosecute otherwise. In lots of other cases, it eases a client’s worries about unpredictable demands on cash flow. And in all instances it makes the interests and incentives of client and lawyer as indistinguishable as possible, short of marriage in a community property state.

What does contingent mean?

Let’s define what a typical contingent fee involves.

Any sort of contingent fee depends — is contingent — on a dispute’s outcome. The fee could come in the form of a lump-sum bonus, a multiple of hourly fees, or some other kind of compensation. But a usual contingent fee (I will address reverse and other unusual contingent fees in future posts) calls for the lawyers to receive a percentage of the “gross sum recovered” with respect to a claim or set of claims by settlement or judgment.

Variable percentages

The percentage will vary from case to case. It often starts at one-third. But it may range lower for engagements that present unusually large potential recoveries. The percentage also often ratchets up within a certain number of days before the final pretrial conference and again when trial begins and the lawyers’ work intensifies.

Another factor that can affect the level of the contingent percentage: who pays expert fees, travel expenses, and other costs. At my firm, where we invest about half of our hours on contingent-fee matters, we show our bias when we pay expenses both by calling for a several-points-higher percentage and by requiring a super-majority vote in favor of taking the case.

Plusses and minuses — client perspective

A client always retains the right to make some major decisions — including whether to settle and for how much — but by engaging a lawyer on a contingent fee the client as a practical matter chooses to exercise less control over the lawyer than under other fee arrangements. Because the client and the lawyer share a common interest in maximizing the recovery, the client expects the lawyer will exercise sound judgment in strategy and tactics and tends not to second-guess the lawyer’s approach. While contingent-fee lawyers do typically keep track of their time, they do not report those details to their clients, removing a key instrument that hourly clients use to manage hourly lawyers.

Nor do contingent-fee clients usually worry about whether the lawyers put enough resources into their cases. The incentive to maximize the gross sum recovered drives both client and lawyer.

Clients generally cannot avoid a promise to pay a contingent fee by discharging the lawyers without their consent. That, too, tends to lessen client control.

But the client can impose discipline by refusing to accept unreasonable settlement offers even if the lawyers recommend taking them.

The risk-sharing aspect of a contingent-fee arrangement compensates the client for the reduction in control. Unlike hourly lawyers but like flat-fee ones, contingent-fee lawyers assume what I have called procedural risk — the chance that the handling of a dispute will eat up far more resources than the lawyers planned for. Contingent-fee lawyers also assume the risk that they will receive nothing for their efforts. If they also fund expenses, out of pocket losses in business disputes can run into the millions and possibly tens of millions. 

With the shifting of great risk comes a transfer of great upside potential. The client promises to pay a portion of any recovery. The fact that the payment usually comes from money that the defendant remits allows the client to keep the promise without coming out of pocket.

Plusses and minuses — lawyer’s view

The control that contingent-fee lawyers exercise springs largely from the strong alignment of their interests with the clients’. Lawyers who work on a contingent-fee basis relish their relative freedom and the more trusting relationship that often prevails with their clients.

Liberty comes at a price. The risk of loss rests heavily on the lawyers under a contingent-fee deal. Inefficiency, bad strategy, poor execution, lack of diligence, burdensome discovery requests, fruitless motion practice, and other dumbness now come at the lawyers’ expenses as much as the clients’.

The corresponding upside gives the lawyers large incentives to handle a case quickly, cost-effectively, and successfully. Having skin in the game makes it more interesting, too.

Not for everyone

Not every case deserves contingent-fee treatment. Many do not.

All of the lawyers at my firm spend hundreds of hours almost every week evaluating and voting on contingent-fee proposals. Many more potential cases never make it even to the proposal stage. The reasons for saying no vary, but they include unpersuasive liability stories, iffy damages, client credibility issues, unrealistic client expectations, low likelihood of collection, unusually high litigation costs, and inability to resolve key issues early in a case.

Clients who can afford to pay hourly or on a flat-fee basis may also shy from contingent-fee engagements. Their reasons typically  involve a desire to maximize control over the handling of a case or concern over information and experience advantages that counsel may have in negotiating contingent fee terms.

The case for going contingent

But cases that do qualify for contingent handling provide big benefits to both client and lawyer.

The sharing of risk all but eliminates the potential conflicts between client and hourly or flat-fee lawyer.

The client largely sheds the risk of an adversary that scorches the earth with aggressive delaying and diversionary tactics and no longer shoulders alone the downside of losing.

The client’s cash flow avoids a constant drain.

And the happy day when the defendant pays the settlement or discharges the judgment makes the lawyer every bit as joyful as the client.

Next time

I’ll return to current events in the next post, on July 6.

It will concern the Second Circuit’s 2-1 decision upholding a judgment against Apple for orchestrating a per se illegal price-fixing conspiracy among book publishers. See United States v. Apple Inc., No. 13-3741 (2d Cir. June 30, 2015).

The dissenting judge on the panel urges that Apple’s role as a mere “enabler” of the horizontal cartel insulates it from liability for a per se antitrust violation.

I’ll offer thoughts on the huge stakes that the disagreement presents next Monday.

Feedback, please

 

In the meantime, take a minute to add a comment, post a question, or send me an email (bbarnett@thecontingency.com). I love hearing from you, and so do the other readers of The Contingency. Don’t hide your light under a basket.

Have a safe and fun Independence Day weekend.

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Photo of Barry Barnett Barry Barnett

Clients and colleagues call Barry Barnett an “incredibly gifted lawyer” (Chambers and Partners) who is “magic in the courtroom” (Who’s Who Legal), “the top antitrust lawyer in Texas” (Chambers and Partners), and “a person of unquestioned integrity” (David J. Beck, founder of Beck…

Clients and colleagues call Barry Barnett an “incredibly gifted lawyer” (Chambers and Partners) who is “magic in the courtroom” (Who’s Who Legal), “the top antitrust lawyer in Texas” (Chambers and Partners), and “a person of unquestioned integrity” (David J. Beck, founder of Beck Redden).

Barnett is a Fellow in the American College of Trial Lawyers, and Lawdragon has named him one of the top 500 lawyers in the United States three years in a row. Best Lawyers in America has honored him as “Lawyer of the Year” for Bet-the-Company Litigation (2019 and 2017) and Patent Litigation (2020) in Houston. Based in Texas and New York, Barnett has tried complex business disputes across the United States.

TRIAL COUNSEL
Barnett’s background, training, and experience make him indispensable to his clients. The small-town son of a Texas roughneck and grandson of a Texas sharecropper, Barnett “developed an unusual common sense about people, their motivations, and their dilemmas,” according to former client Michael Lewis.

Barnett has been historically recognized for his effectiveness and judgment. His peers chose him, for example, to the American College of Trial Lawyers and American Law Institute. His decades of trial and appellate work representing both plaintiffs and defendants have made him a master strategist and nimble tactician in complex disputes.

Barnett focuses on enforcement of antitrust laws, the “Magna Carta of free enterprise,” in Supreme Court Justice Thurgood Marshall’s memorable phrase. “Barry is one of the nation’s outstanding antitrust lawyers,” according to Joseph Goldberg, a member of the Private Antitrust Enforcement Hall of Fame. Named among Texas’s top ten antitrust lawyers of 2023, Business Today calls Barnett a “trailblazer” among the “distinguished legal minds” who “dedicate their skill and expertise to the maintenance of healthy competition in various sectors” of the Lone Star State’s booming economy. Barnett is also adept in energy and intellectual property matters and has battled for clients against a Who’s Who list of corporate behemoths, including Abbott Labs, Alcoa, Apple, AT&T, BlackBerry, Broadcom, Comcast, Dow, JPMorgan Chase, Samsung, and Visa.

Barnett commands a courtroom with calm and credibility and “is the perfect lawyer for bet the company litigation,” said Scott Regan, General Counsel of former client Whiting Petroleum. His performance before the Supreme Court in Comcast Corp. v. Behrend prompted the Court to withdraw the question on which it had granted review. The judge in a trial involving mobile phone technology called Barnett “one of the best” and that his opening statement the finest he had ever seen. Another trial judge told Barnett minutes after a jury returned a favorable verdict against the county’s biggest employer that he was one of the two best trial lawyers he’d ever come across—adding that the other one was dead.

COMPLETE PACKAGE
A versatile trial lawyer, Barnett knows how to handle a case all the way from strategic pre-suit planning to affirmance on appeal. He’s tried cases to verdict and then briefed and argued them when they went before appellate courts, including the Second, Third, Fifth, and Tenth Circuits, the Supreme Court of Louisiana, and (in the case of Comcast Corp. v. Behrend) the Supreme Court of the United States.

Barnett is a sought-after public speaker, often serving on panels and talking about topics like the trials of antitrust class actions and techniques for streamlining complex litigation. He also comments on trends in commercial litigation and the implications of major rulings for outlets such as NPR, Reuters, Law360, Corporate Counsel, and The Dallas Morning News. He’s even appeared in a Frontline program about underfunding of state pensions, authored chapters on “Fee Arrangements” and “Techniques for Expediting and Streamlining Litigation” (the latter with Steve Susman) in the ABA’s definitive treatise on Business and Commercial Litigation in Federal Courts, 5th, and commented on How Antitrust Enforcers Might Think Like Plaintiffs’ Lawyers.

HARD GRADERS
Clients and other hard graders have praised Barnett for his courtroom skills and legal acumen.

A client in a $100 million oil and gas case, which Barnett’s team won at trial and held on appeal, said Barnett and his team “presented a rare combination of strong legal intellect, common sense about right and wrong, and credibility in the courtroom.” David McCombs at Haynes and Boone said Barnett “has a natural presence that goes over well with juries and judges.”

Even former adversaries give Barnett high marks. Lead opposing counsel in a decade-long antitrust slugfest said “Barry is a highly skilled advocate. He understands what really matters in telling a narrative and does so in a very compelling manner.”

CIVIC ENGAGEMENT
Barnett relishes opportunities to collaborate with all kinds of people. At the Center for American and International Law (CAIL), founded by a former prosecutor at Nuremberg in 1947 and headquartered in the Dallas area, he has served on the Executive Committee, co-chaired the committee that produced CAIL’s first-ever strategic plan, supported CAIL’s Institute for Law Enforcement Administration and other development efforts, and proposed formation of a new Institute for Social Justice Law. CAIL’s former President David Beck said “Barry is extremely bright” and is “very well prepared in every lawsuit or professional task he undertakes.”

Barnett is also a Trustee of the New-York Historical Society, a Sterling Fellow at Yale, a member of the Yale University Art Gallery’s Governing Board, a winner of the Class Award for his work on behalf of his college class, and a proud contributor to the Yellow Ribbon Program at Harvard Law. Barnett’s pro bono work includes leading the trial team representing people who are at greatest risk of severe illness and death as a result of being exposed to the novel coronavirus SARS-CoV-2 while being detained in the Dallas County jail—work for which he received the NGAN Legal Advocacy Fund RBG Award.

At Susman Godfrey, Barnett has served on the firm’s Executive Committee, Employment Committee, and ad hoc committees on partner compensation, succession of leadership, and revision of the firm’s partnership agreement. He also twice chaired the Practice Development Committee.

KEEPING PERSPECTIVE
Barnett understands that clients face many pressures. Managing the stress is important, especially in matters that take years to resolve. He encourages clients to call him whenever they have a question or concern and to keep the inevitable ups and downs in perspective. He wants them to know that he will do his level best to help them achieve their goals. He also strives to foster trust and to make working with him a pleasure.

Cyrus “Skip” Marter, the General Counsel of Bonanza Creek in Denver and a former Susman Godfrey partner and client, said Barnett is “excellent about communicating with clients in a full and honest manner” and can “negotiate for his clients from a position of strength, because he is not afraid to take a case through a full trial on the merits.” Stacey Doré, the President of Hunt Utility Services and a former client, said that Barnett is “an excellent trial lawyer and the person you want to hire for your bet-the-company cases. He is client focused, responsive, and uniquely savvy about trial and settlement strategy.” A New York colleague said, “Barry is a joy to work with as co-counsel. He tackles complex procedural and factual hurdles capably, efficiently, and without drama.”

PERSONAL
Barnett’s wide-ranging experience and calm, down-to-earth approach enable him to connect with clients, judges, jurors, witnesses, and even opposing counsel. He grew up in Nacogdoches, Texas. He co-captained his high school varsity football team as an All-East Texas middle linebacker while also serving as the Editor of Key Club’s Texas-Oklahoma District, won the Best Typist award, took the History Team to glory, and sang in the East Texas All Region Choir. As Dan Kelly of client Vistra Corp. put it, Barnett is “a great person to be around.”

Barnett is steady and loyal. He has practiced at Susman Godfrey his entire career. He and his wife Nancy live in Dallas and enjoy spending time in Houston and New York. Their daughter works for H-E-B in Houston, and their son is a Haynes and Boone transactions lawyer in Dallas.

As a member of Ivy League championship football teams in his junior and senior years at Yale and a parent of two Yalies, Barnett has no trouble choosing sides for “The Game” in November. And he knows how important fighting all the way to the end is. On his last play from scrimmage, in the waning minutes of The Game on Nov. 22, 1980, he recovered a Crimson fumble.

Yale won, 14-0.