Smith Jones LLP* had traditionally done all its work on an hourly fee basis. However, certain developments led it to consider offering contingency fees. First, an IP partner had a potential new client interested in pursuing a strong patent claim with a very large potential damages award. Second, a longstanding client with a new VP-Legal focused on creative fees and budget preservation invited the firm to submit a fee proposal for a large theft of corporate opportunity claim. Third, Smith Jones LLP was acting on an oppression claim, but three months into the litigation, the client stopped paying its bills.
All three of the cases had strong merits. The firm estimated that it could earn $1.5m in fees from each case, and that each had a likely $15m damages award. Bentham agreed with this assessment and offered to provide the firm with portfolio financing, where it would invest $2.25m in the firm, representing half of anticipated fees. In exchange, the firm would pay Bentham a multiple on its invested money, to be paid only from its success fees in the cases. This would enable the firm to offer each client a contingency fee arrangement, whereby the firm would not charge legal fees as the case progressed and the client would pay only the disbursements. In return, the client would pay Smith Jones LLP 33% of any damages award or settlement.
The firm compared its risk and potential rewards under (A) its traditional hourly fee model, (B) Bentham’s portfolio structure or (C) a pure contingency fee arrangement. In this case, Bentham paid the full $2.25m upon closing, and the analysis assumed that the portfolio cases would resolve in the period during which Bentham’s return would be 2.5x its investment.
In assessing its options, Smith Jones LLP recognized the business risks in the hourly fees model: (1) without a creative option, the clients could go to other firms, leading to $0 revenue and a possible loss of client relationships; (2) if the cases settled early, Smith Jones LLP would have less revenue than anticipated; and (3) if the clients were late or negligent in paying bills, it would create stress on Smith Jones LLP’s cash flow.
Similarly, there were business risks in the 100% Contingency Model: (1) cash flow constraints for the duration of the cases; (2) if none of the cases succeeded, $0 revenue to Smith Jones LLP; and (3) internal strain on the partnership relating to resource allocation and productivity.
The potential returns under the portfolio structure were significantly greater than the hourly fees model, and the risk of a full contingency model was mitigated by Bentham’s financing. It also allowed Smith Jones LLP to be a valuable business partner to its clients.
Ultimately, Smith Jones LLP offered its clients the contingency fee arrangements with Bentham’s portfolio financing support. This gave the firm higher returns than it would otherwise have received, while securing mandates from existing and new clients.
Bentham has funded over a dozen law firm portfolios in the U.S. and Canada. We welcome the opportunity to speak about potential funding arrangements at any time. If you would like to learn more, please do not hesitate to contact us.
*The law firm name has been changed to protect the privacy of the firm.