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Welcome to the Big Law Business Chronicle on the changing legal market written by me, Roy Strom. Today we take a look at Big Law’s long history of internal feuds over contingency fee payments. Register now to receive this column in your inbox on Thursday morning.
A giant pile of money sounds good. But in large law firms, they often argue over it.
Partners in law firms have a long and unhappy history of contention fee payments bickering. Now is the right time to talk about it.
A big contingency fee payment was important in an article I wrote last week about the sudden impeachment of Dentons US CEO Mike McNamara. Additionally, Quinn Emanuel received $ 185 million in contingency fee payments this week.
One business is in the middle of a fight for money, the other is about to get paid. The circle of life.
Start with Dentons, where it’s still unclear what will happen with a $ 35 million contingency fee won by a case brought to the company by ex-partner Jinshu “John” Zhang. Since winning the honorarium, Zhang has been fired. The person Zhang negotiated his share of the fees with, McNamara, was dismissed as US CEO.
A simple lesson for law firms and their attorneys is that separating a huge pool of money doesn’t have to be so controversial.
After getting the prize, Zhang said he tried to negotiate his cut with McNamara. He wanted something around 80% to 90% of the price, depending on both sides. He also said he wanted a position on the Dentons board, over which McNamara had considerable influence.
Zhang told me that he was less interested in the board position than he was in making a statement about how he perceives strong leadership to play the favorites.
Meanwhile, a CEO of a law firm is responsible for delivering financial results to all partners. Distributing 90% of an eight-figure amount to one person does not go as far, politically, as distributing it across the constituency.
Much has happened between the two sides, and the story is far from over, as Zhang is pursuing a wrongful dismissal complaint against the company. But it appears the money has exacerbated an underlying lack of confidence. He also pointed out how informal the process can be in figuring out how to divide such large fees.
Many large law firms do not often do contingency fee work. Even though they have some sort of committee to determine contingency fee compensation, it is difficult for them to have developed meaningful respect. Like any kind of democratic institution, people have to believe in it for its decisions to be valid.
Some longtime Dentons lawyers may recall a similar episode that took place at one of its predecessor firms, Sonnenschein Nath & Rosenthal.
A former partner, Douglas Rosenthal, sued the firm in 2005, claiming he was missing more than $ 8 million in unexpected fees he received from representing the families of the victims of the bombing in 1988 against a Pan Am flight over Scotland. The Case dragged on for years even after a judge awarded Rosenthal more than $ 3 million in 2008.
Dentons is far from the only company to have experienced this kind of tension.
Manatt Phelps & Phillips for follow-up a former partner and the law firm he went to, taking with him a case that generated a $ 10 million contingency fee. Akin Gump was the target of a trial by a solo attorney who says the firm bypassed him on a referral fee involving a contingency fee case. The examples follow one another and they appear in almost every conceivable permutation.
Kent Zimmermann, director of legal consultancy Zueghauser Group, said windfall profits on contingency fees may present a question of survival for some small firms. The fear is that partners will no longer need to work after getting a life-changing fee. For large firms, the problem is getting partners to agree on how much to invest in the firm’s future rather than rewarding the lawyers responsible for the money.
“It’s a good problem to have, but it’s a problem in a lot of businesses when these big fees kick in,†he said.
The late Stephen Susman, founder of Susman Godfrey and expert in contingency fee litigation, spoken in 2019 with David Wilkins of Harvard Law School on why large law firms have problems with contingency fees.
His commentary addresses the underlying problem: Big Law partners are used to being paid by the hour. And they don’t look favorably on partners who forgo this reliable business model to try their luck in a contingency fee case.
“Other lawyers at the firm are frustrated with their partners who have engaged the firm in these endless emergencies because they see no return of money,†Susman said. “These partners who got them involved in the affair, now withdrawn from their partnership, are leaving to go elsewhere. And now the firm is stuck with a case that has been going on for three years, it cost them a lot of time and money, the partners who brought the case are not even there anymore, and there is no end in sight. You see this happens quite often.
Contingency fee billing is said to be more common in Big Law today, especially with the increased use of litigation funding. I thought that funders could provide advice to large law firms on structuring their compensation decisions around contingency fee cases. It doesn’t seem like this happens very frequently. Sources from two large funders have told me that large law firms are not interested in this advice.
I asked Quinn Emanuel to discuss how he decides on partner compensation in contingency fee cases. The firm declined to comment.
One thing Quinn has going in her favor is that she has more experience in litigation and contingency fees than most of the big law firms.
One thing is not working in its favor: the industry’s long track record of fighting for heaps of money.
Worth your time
On cannabis: My colleague Joyce Cutler reports the growing number of large law firms trying to make money in the cannabis industry. She says notoriously risk-averse businesses are bracing for the practice now that 19 states allow recreational use.
On the financing of litigation: Longford Capital announces that it has closed its third investment fund with a total of $ 682 million. The company has added about $ 250 million in fundraising since I announced in January that it had raised $ 434 million.
On internal services: Brian Baxter reports that the legal director of Blizzard Entertainment Inc. left the company amid a scandal at Activision Blizzard Inc., which faces charges of sexual harassment and discrimination.
It’s all for this week ! Thanks for reading and please send me your thoughts, critiques and advice.
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