Bigger firms taking cases on contingency

James Wallace, partner in a 270-lawyer Washington, D.C. firm, never used to get calls from potential plaintiffs. But now he gets them almost every day.
That’s because in March 2006, Wallace’s first venture into plaintiffs’ work at Wiley Rein resulted in a whopping $612.5 million settlement for his client in patent infringement suit.
The high-profile suit pitted Wallace’s client, a small Virginia company named NTP, Inc., against Research in Motion, maker of the Blackberry, and Wallace’s client – and the firm he founded 23 years earlier – walked away the winner.
Since its inception, the firm has built a solid reputation defending corporate clients and, like other large firms, Wiley Rein was reticent about crossing over to the plaintiffs’ side.
But a settlement of that size, which resulted in a revenue spike of more than $200 million, is hard to play down. In one shot, the case brought in more money to Wiley Rein than the firm made in the entire previous year, when its revenues were $151 million.
“For what would be a relatively small investment of time, we had the opportunity to have a rather substantial award,” Wallace said. “It added a certain excitement to the firm. It was good for morale.”
Although the firm had done a few smaller-scale contingency cases over the years, the success of the NTP settlement has increased the likelihood that Wiley Rein will take on another larger-scale contingency case.
“My partners are always asking me, ‘Jim, when’s the next Blackberry case coming in?’”
And Wiley Rein is not alone.

Larger-firm contingency cases
The traditional reticence by larger firms to engage in contingency work is receding, according to lawyers and consultants. The reason: Escalating costs.
“There’s been a lot of attention by law firms to get away from being limited by hourly billing,” said Kenneth L. Adams, a partner at 375-lawyer Washington, D.C. law firm, Dickstein Shapiro, which has taken the unusual step of devoting about 10 percent of its annual budget to contingency cases. “You can only bill so many hours a day and you can only raise rates to a certain level before clients refuse to pay. And your costs keep going up.”
Those costs, such as rising associate salaries, discovery costs and health insurance rates, have squeezed the profits of many large firms, according to Robert Friedman, an insurance coverage litigator at Gunster Yoakley in West Palm Beach, Fla.
“It’s all about leverage,” he said. “If you’re a senior partner and you’ve got 10 associates working for you and you make a hundred grand off each one of them, that’s your $1 million profit for the year. But if you need to pay associates more and more, that calls into question the ability to continue to raise rates and pass on those costs. It forces you to look around for other ways to raise revenues, and the contingency model is a way to do that.”
Alan R. Olson, a principal with Altman Weil in Milwaukee, said he’s seen a greater receptivity to contingency matters by large and medium-size firms. But most often, he said, they’re part of a mixed arrangement of various “success fees,” which he defines as “agreed-upon bonuses over and above a sometimes reduced hourly rate or fixed fee, for a specified outcome either in a transaction or litigation.”
At Dickstein Shapiro, the firm’s commitment to contingency litigation developed out of the class action opt-out practice Adams began in 1995.
The agricultural giant Archer Daniels Midland was the defendant in a class action antitrust case accusing the company of a price fixing scheme involving the dietary supplement lysine. Adams, representing Continental Grain Co. and a group of animal feed producers, led an effort to let them “opt out” of the class and pursue their own litigation. The result was that “we recovered multiples of what our clients would have gotten had they stayed in the class.”
Following this success, he represented a group of corporate plaintiffs that opted out of another price fixing class action involving vitamin manufacturers. He negotiated a settlement that brought his clients more than $2 million.
Based largely on the plaintiffs’ practice developed by Adams, Dickstein Shapiro has some of the highest per-partner revenue rankings in the country.
It’s also a reason why the firm has formally committed to contingency work by designating a 10-percent budget goal for that category.
“One of the reasons for its success here is that we view the other 90 percent of the firm’s practice as what we live on,” he said. “We view the contingency stuff as bringing us an extra upside. If it comes home to roost, everybody has a big year and you can put money away for your kid’s education or your retirement or whatever.”
The tricky part, he said, was finding a way for a contingency practice to succeed inside a firm that is dominated by defense work on behalf of large corporations.
“What we found was not only that you can do it, but the model translates very well to other areas of our practice,” he said, noting that the firm now uses contingency fees in intellectual property and insurance cases.
The keys to success
Wallace contends that there are no particular secrets to carving out a contingency practice in a large corporate defense firm.
“It’s like making an investment or running a business,” he said. “You need to look at your options to determine the odds of various things happening – and then you decide whether this is a good business plan or not.”
He said that in the Blackberry case, several factors made it a good choice for the firm to take on.
“It’s very important when you’re doing a case on contingency that you do it where it can happen quickly,” said Wallace.
In the Blackberry case, the defendant was a Canadian company, meaning it couldn’t transfer the case from the Eastern District of Virginia, which has a reputation as a plaintiff-friendly “rocket docket.”
“So we were reasonably confident that we could try it in about a year, which is something that’s important if you’re not getting paid until the case is over,” said Wallace.
He also said he was convinced the case was solid, the company’s patent had been infringed, and the lead inventor and the company president were excellent witnesses.
But most important, he believed the potential payoff justified the risk.
Now that he’s taking phone calls from potential plaintiffs several times a week, he’s seeing how difficult it is to find cases that fit all those criteria.
“It’s in the contingency area that people want to bring lawsuits that don’t make economic sense. For them it might make economic sense – if they can find a sucker lawyer to do it on a contingency,” said Wallace.
Adams had a similar assessment.
“You look at the likelihood of success on the merits, the law and the facts,” he said. “You look at the upside – if you’re successful will it justify the downside if you’re not? It’s the usual kind of cost-benefit analysis that any sensible business decision requires.”
Traditionally, the firms that handle contingency cases have been small personal-injury firms. But big-firm lawyers doing contingency cases argue smaller firms may lack the resources needed to weather the sustained period when the money flow is heading out of the law firm and not into it.
Wallace pointed out that in the Blackberry case, his firm had expenses of about $7 million in lawyers’ and staff time in addition to out-of-pocket expenses.
“In a small firm, not only do you not have the cash flow to cover it; but by putting a bunch of people on a contingency fee for the short term, you’re lowering your cash flow.”
One of the cases generating big-firm contingency work is the Exxon Valdez litigation, which is now 18 years old. Late last year, a federal appeals court awarded the plaintiffs in that case $2.5 billion in punitive damages, and lawyers estimate that accrued interest over about 10 years could nearly double that amount.
Exxon has petitioned the 9th Circuit for en banc review, and lawyers say the case is likely to drag on for a least another year, and maybe three. But when the resolution finally comes, the payoff for some of the firms working on contingency could be $1 billion.
Adams is one of those lawyers and he said Dickstein Shapiro has spent $12 million so far – but could collect as much as $100 million.
When the money comes in, the contingency lawyers are very popular within the firm. At Wiley Rein, every staff member at the firm received a bonus.
But the risks of failure are significant.
“The firm may have invested significant time and money and other resources into the case and may have paid some or all of the individual lawyer’s typical or base compensation during this period,” said Olson of Altman Weil. “This must be balanced against the risks, rewards and incentives for individuals who brought in the case, worked on the case and managed the case to a successful conclusion.”
As costs escalate, more firms are looking at balancing those risks.
“I think these conversations are going on at a lot of firms,” said Friedman. “People are talking about the limits of the billable hour and being more entrepreneurial.”