Sugar-coated bills

Revealed: the fee structures underpinning the Quinn Emanuel litigation machine

Late last year, when The Lawyer ­unveiled the world’s top 50 firms by litigation revenue (5 December 2011), one firm stood out.

You could almost be forgiven for emitting an exasperated sigh when you read that the firm was Quinn Emanuel Urquhart & Sullivan. When it comes to excellence in disputes, the US firm – the 2011 winner of The Lawyer Awards International Law Firm of the Year – is fast becoming ubiquitous.

Super charging

But credit where it’s due. As part of the top 50 research last year, for the first time we asked for details of the innovative fee structures firms were offering their budget-constrained clients.

Anecdotally, almost any litigator you speak to these days will tell you they are flexible on fees and willing to cut deals. But when asked by The Lawyer, only Quinn Emanuel was willing to go beyond the bland and offer details.

While we asked every firm the same question about fee structures, most declined to give any details, with several dismissing the query by claiming client confidentiality. Others offered vague descriptions of their ability to be ‘flexible on fees’ or provide ‘discounts’.

Contrast that with Quinn Emanuel’s response (see box, page 30). Even rivals that were sent the examples admitted to being impressed by the level of detail and financial ­information contained in the trio of cases, each of which included a contingency fee element.

Now, with the new year underway, the US firm’s candour remains ­refreshing. The case examples ­continue to say a great deal about the way Quinn Emanuel achieves its huge success. But it also offers ­pointers as to the likely development of the UK litigation market once ­contingency fees are legal on this side of the Atlantic.

How Quinn Emanuel does it

First, though, the money. In Quinn Emanuel’s first alternative fee ­example, where it represented an ­insurance company as plaintiff, the damages were potentially in excess of $150m (£97.09m). Quinn Emanuel estimated the cost of litigation, ­including any trial, to be between $12m and $15m.

The US firm charged a flat fee of $750,000 simply for taking on the case. That covered the cost of drafting the complaint and opposing a motion to dismiss.

On top of that there was another flat fee of $150,000 per month up to a cap of $4.25m, with all fees in excess of $5m absorbed by the firm. Quinn Emanuel was then in line to receive 20 per cent of any recovery via settlement or verdict. To save you the bother of getting out your calculators, that is at least $30m.

Remember, this is a real case, not a model. The firm preferred not to name the client, so the eventual outcome is not known, but small wonder that Quinn Emanuel posted a record turnover last year of $550.5m and an average profit per equity partner (PEP) of $3.6m.

“We almost always do better on contingent than hourly,” admits the firm’s founder John Quinn.

How much better? asked The Lawyer.

“It varies wildly,” concedes Quinn, “from 125 per cent of the hourly rate to multiples of many. One-third of our work in the US has some ­contingent fee aspect.”

Quinn Emanuel is now a firm of 475 lawyers, so not many firms of a similar size can go down the contingent route to the same extent. Most are full-service firms with large ­corporate and finance groups that are likely to be blocked by conflicts from working in the same way as Quinn Emanuel in terms of handling as much work for plaintiffs or offering the same fee structures.

In contrast, Quinn Emanuel has a free hand and is able to go either way when it comes to representing plaintiffs or, less commonly, defendants.

Indeed, the firm’s third case example, in which it represented a large high-tech company sued in the US for antitrust price-fixing, is for a ­defendant.

In that case Quinn Emanuel ­received a flat fee of $750,000 if it ­prevailed on the motion to dismiss and nothing if it lost. It did not lose, by which it added another $250,000 to last year’s pot.

“You need to be more creative on the defence side,” says Quinn. “It’s not as straightforward as acting for the plaintiff, as the contingency fee’s taken from the recovery and there’s no recovery by the defence.”

That raises new questions.

“How do you measure success?” asks Quinn. “How do you reach agreement with your client?”

At its simplest, says Quinn, the fee negotiations are likely to start with something along the lines of, ‘If we can get rid of this on a motion to ­dismiss or summary judgement we’ll get a bonus of X; if we try the case we’ll get X-plus’.

“It’s very rare on the defence side to have a pure contingency fee,” he admits. “What’s more common is a reduced hourly rate or a fee cap.”

Brit pops

The UK lawyers who were shown Quinn Emanuel’s trio of case examples ahead of publication were unanimously intrigued. That, however, did not stop them from offering the occasional criticism.

One UK general counsel raised the issue of potential conflicts generated by the “direct pecuniary involvement in the outcome of the case”.

Many of the litigators The Lawyer spoke to were strongly in favour of contingency fees, however. Addleshaw Goddard’s Richard Leedham says: “Practices have to start thinking like this now because clients have limited budgets and want certainty.”

Enyo Law partner Simon Twigden, the lawyer who handled the first-ever conditional fee arrangement (CFA) in the Commercial Court for corporate finance boutique Matrix, is perhaps unsurprisingly a strong advocate of contingency fees.

“Options A and B are certainly something we’d do if we were ­allowed to do so,” he confirms, ­referring to Quinn Emanuel’s three examples. “Option C may be used on competition cases where, in essence, liability is established and the issue is in reality to do with quantum. Most of all it’s about choice for the clients and getting lawyers to align their interests with their clients’.”

Taylor Wessing litigation partner Shane Gleghorn made the following observation about the first example, in which Quinn received a flat fee of $150,000 per month up to a cap of $4.25m.

“One key point about monthly flat fees is that, perhaps counterintuitively, the client may be best served by a mechanism that allows that monthly flat fee to be exceeded,” says Gleghorn.

The beauty of this approach, he says, is that the lawyer always has an incentive to come up with inventive strategies midway through the case.

“In the case of a defence role,” he adds, “that [can] result in the claim being struck out entirely, or significantly confined in scope, or in the case of a claimant role aspects of the defence [could be] struck out.”

Of course, as Gleghorn continues, a lawyer should be inventive and creative irrespective of the fee structure.

“But I can see a practical argument that some leeway for the lawyer may assist,” he concedes. “It’s fair to say that such applications can, to a greater or lesser degree, be anticipated at the start of the process; but litigation tends to throw up strategic decisions that weren’t anticipated. Those type of applications may cost more than the flat fee, so it may be helpful to ensure that the lawyer’s has more incentive to come up with ideas that don’t follow the mechanical ‘let’s prepare for trial’ approach.”

In other words, the devil is often in the detail when it comes to carve-outs to the flat fee structure.

“A question might be, ‘Are you careful to ensure that you have a number of carve-outs to the flat fee structure so that the client and lawyer can agree to make a costly, but potentially highly effective, departure from the original strategy, or do you believe it suffices for the client to leave it to the lawyer to raise strategic options that may, on one level, be unattractive to them because they will blow their internal costings’,” the Taylor Wessing partner concludes.

Good condition

One thing looks certain. Quinn Emanuel’s track record in structuring these deals, whether its for the claimant or the defendant, is likely to put it in pole position to capitalise on the imminent changes in the UK market.

“Our practice in London’s very much like our practice in the US,” ­asserts Quinn, a statement that will be interpreted by rivals as sounding very much like a warning shot across the market’s bows. “In London ­[partners] Richard [East] and Sue [Prevezer QC] have always done CFAs, while as a firm we have plenty of in-house experience in structuring these arrangements.”

Thanks to the Jackson reforms, the UK market is poised to embrace contingency fees, potentially later this year, although there are still hurdles to be cleared in the House of Lords.

Once they are in – and there appears to be little doubt that they will be allowed at some point in the future – most UK firms will need to be as creative as Quinn Emanuel in structuring fee deals.

The big but…

But other firms with track records of structuring these deals are happy to sound a word or two of warning.

Ed Estrada, a New York-based litigation partner at Reed Smith, says that around 40 per cent of all his group’s matters are handled on an ­alternative fee arrangement (AFA).

“One of the key things about contingency fee arrangements is that it’s critical to have an ‘overlapping inventory’,” Estrada points out. “In other words, you need to have several cases that don’t all start and finish at the same time. If you’re doing a case on contingency you’d better have other things in the hopper. And the key thing is to make sure you’re ­taking on the right matters.”

Reed Smith attorney Matt Sheldon polices this for the firm from its office in Falls Church, North Virginia.

US firms such as Quinn have years of experience in structuring these arrangements. Now it is time for UK litigators to play catch-up.

Alternative fee examples

Three cases provided by Quinn Emanuel for The Lawyer’s annual top 50 firms by litigation revenue:

A

We represent a large insurance company as plaintiff in a very complex, contentious litigation where the potential damages could reach  $150m or more.

The law in the area is unsettled.

We have estimated the cost of litigation through trial to be $12m to $15m. Our financial arrangement is as follows:

  • Quinn receives a flat fee of $750,000 for (a) the drafting of a complaint and (b) opposing a motion to dismiss.
  • Quinn receives a flat fee of $150,000 per month up to a cap of $4.25m.
  • Quinn absorbs all fees in excess of $5m.
  • Quinn receives 20 per cent of any recovery via settlement or verdict.

B

We represent a hedge fund as plaintiff in a very comSWa dispute over a [collateralised debt obligation]:

  • Quinn receives a flat fee of $20,000 per month through trial, regardless of the level of activity in the lawsuit.
  • Quinn receives 20 per cent of any recovery via settlement or verdict.

C

We represented a very large, high-tech company that was sued in the US for antitrust price-fixing:

  • Quinn files a motion to dismiss the antitrust complaint, reply brief and argument for client.
  • Quinn receives nothing if we lose the motion to dismiss.
  • Quinn receives a flat fee of $750,000 if we prevail on the motion to ­dismiss (which is what happened).

What Quinn Emanuel does

Quinn Emanuel Urquhart & Sullivan is a 500-lawyer firm, the largest in the US devoted solely to business litigation.

According to the firm’s website, its lawyers have tried 1,460 cases and won 1,326, or 91 per cent, a success rate built largely upon the quality of its lawyers and an aggressive litigating style that appeals to its client base of financial institutions, technology companies and major corporates. 

Late last year the success of the firm and its rampant profitability was reflected in associate bonuses that ranged from $6,375 to $62,000, considerably more than

at any other full-service US firm, including Cravath Swaine & Moore, Skadden Arps Slate Meagher & Flom and Simpson Thacher & Bartlett.

Third-party funding

The entry of contingency fees into the UK market will not only mean that litigation practices will have to be cannier about maintaining cashflow, but it is also likely to throw the door wide open to third-party funders.

As Stewarts Law managing partner John Cahill puts it, the two facts may be inextricably intertwined.

“It’s absolutely right that outcome-based fees or damages-based agreements will have a more significant role in the future,” states Cahill. “That said, firms will still need cashflow and that’s not easily achieved if everything’s being run on a contingent basis. Cases can take three to four years before you get paid.”

There is a refinement to this arrangement, Cahill adds, and it is one that over the coming months may become common currency in the UK.

“A firm trades some of its contingent points with a third-party funder in lieu of that funder providing quarterly or monthly cashflow,” notes Cahill.

So if a firm is willing to offer up a chunk of the recovery, say 5 per cent, the deal is that the third-party funder would pay a certain amount each month, guaranteed.

Even if the case is lost the firm would still have the interim billing because the funder will be working with an after-the-event provider, which means the fees do not have

to be repaid.

“That’s the model Stewarts Law’s likely to be most interested in when contingency fees are allowed in the UK,” says Cahill.

Fee structures: what will change

The reforms to civil justice unveiled by Lord Justice Jackson in January 2010 paved the way for US-style contingency fees in the UK for the first time. Once enacted the reforms, aimed at reducing costs, will introduce damages-based agreements in commercial litigation. As a result commercial litigators will be free to take a

cut of damages in cases.

The key recommendations include:

  • Success fees and after-the-event insurance premiums should cease to be recoverable
  • in conditional fee arrangements (CFAs)
  • Success fees in CFAs should be capped at 25 per cent of damages and awards of general damages raised by 10 per cent
  • The use of referral fees should be banned
  • A contingency fee model should be introduced, but must be regulated properly and an ­independent lawyer should ­advise on what structure it will take
  • Judges, litigators and barristers should receive training on costs budgeting
  • A standard costs management procedure should be established
  • An increase in judicial ­responsibility for controlling costs