Litigation can cause a huge financial burden to small businesses, especially as attorneys’ fees reach hundreds and even thousands of dollars per hour.
But in response to soaring legal costs and client demand for cost predictability and transparency, more firms are offering alternative fee arrangements such as contingency and flat fee billing.
This is an important development in a society where legalese is omnipresent, lawsuits are sometimes unavoidable, and access to legal representation is often less a luxury than a necessity.
Tort Costs for Small Businesses
Small businesses are the engine of U.S. job growth, but they are disproportionately burdened with tort liability.
According to a 2010 report from the U.S. Chamber of Commerce, the tort liability price tag for U.S. small businesses in 2008 was $105.4 billion. Despite only taking in 22% of revenue, small businesses bore 81% of business tort liability costs.
Research from the National Center for State Courts found that median litigation costs for torts run into the tens of thousands of dollars. This includes many of the disputes that small businesses are commonly involved in, such as real property cases (median cost: $66,000), employment cases ($88,000), and contract cases ($91,000).
A report by the Small Business Administration entitled “Impact of Litigation on Small Business” notes that small businesses reported paying hourly attorney rates of $150 - $350 per hour ($200 - $450 per hour in 2017 dollars). Respondents said that lawyers were necessary “but expensive and not very engaging.”
To reduce legal costs, some of the business owners surveyed resorted to using their own staff to perform case-related research and administrative tasks. Owners found that the attorneys needed “more assistance than they appear to need because they are not as integrally involved in the case.”
But lawyers being paid on an hourly basis may simply lack the incentive to be more involved in the case since they are paid hundreds of dollars per hour, regardless of the case’s outcome.
Alternative Fee Arrangements Offer Better Client Value
The hourly attorney fee model is not effective at aligning the interests of attorney and client. As a result, clients are increasingly demanding alternatives to the hourly billing model. Two of the most popular alternatives are fixed (or flat) fee and contingency (or success) fee.
In a flat fee billing arrangement, the lawyer and client agree upon a fixed rate for either the entire service, or for individual services (such as drafting legal documents). While flat fee billing can work well for relatively simple and routine legal services, it can be impractical for more complex matters such as a business dispute. An attorney may therefore perform work on a mixed fee basis in which work performed up to a certain point is done on a flat fee, but beyond that, a separate, hourly fee is added.
A business litigation attorney who works on a contingency basis typically charges no up-front fees, and collects a fee—usually around one-third of the recovery—only if the client is awarded damages in the case. Contingency fee representation is the norm in personal injury cases, but is less common in business disputes.
While firms that handle business disputes on a contingency-fee basis may be more selective about the cases that they accept, their success is ultimately tied to the success of the client, which creates a shared vision and a true attorney-client partnership.