With the recent economic downturn forcing businesses to conserve capital, funding a six- or even seven-figure litigation budget can be daunting, if not impossible. Without the capital to fight, a business can be forced to resolve a dispute on unfair terms or even forgo the pursuit of meritorious claims.

For businesses faced with this economic reality, one option is to engage a law firm on a contingency-fee arrangement. Many business people, however, still have the misconception that commercial litigators only charge by the hour, even though contingency-fee representation for businesses is more common than ever before.

Working under a contingency fee, a law firm is paid no retainer or hourly fees, but, instead, receives a portion of the recovery from the case. This shifts much of the financial burden and risk of the litigation to the law firm, which may spend hundreds of thousands or even millions of dollars in attorney time and hard costs on a case, without assurance of ever making a recovery. On the other hand, a business proceeding under a contingency fee eliminates its most significant financial risk – large, upfront cash expenditures for attorneys' fees and costs.

If a business has a strong legal claim, but is unable or reluctant to fund expensive litigation, a contingency-fee arrangement might be a good option. But before going this route, there are a few questions to consider.

• What types of business cases can be handled on a contingency?

While certain business cases are not compatible with a contingency-fee arrangement, such as claims for nonmonetary or injunctive relief, most types of commercial cases can be handled on a contingency. For instance, contract disputes, director and officer misconduct, investment losses, professional malpractice (e.g., accountant, lawyer, insurance agent), real estate litigation, and unpaid compensation claims can be well-suited for a contingency-fee arrangement. Also, certain niche areas such as construction-defect claims and intellectual property litigation are often handled on a contingency fee.

Even though many types of business cases can be handled on a contingency, it is important to consult with a law firm that has experience handling your type of claim on a contingency. Before engaging a law firm on a contingency fee, confirm that they have handled similar cases and that they have done so on a contingency. Litigating successfully on a contingency involves different strategies and a different approach than litigating hourly, so it is important to engage counsel that has the requisite experience.

• How does a law firm vet a contingency-fee business case?

The next question to consider is whether a contingency-fee arrangement works for your particular claims. Before accepting your case on a contingency, a law firm will want to vet your claims to answer three questions: how strong is the liability? what are your damages? and are the claims collectible? Without winning claims, with enough damages to justify the high cost of business litigation, and a means to collect on a judgment, a sophisticated law firm is not likely to accept your case on a contingency.

In order to encourage a law firm to accept your case, you want to make the case review process as simple as possible. That means marshaling and organizing your evidence, identifying the key documents, providing summaries of the facts, and above all, making yourself available to quickly answer questions and provide information as needed. The simpler you can make the vetting process, the more likely it will be that a law firm accepts your case on a contingency.

The vetting process can also benefit your company even if the law firm does not accept your case. You essentially get free legal analysis and insight into how strong your claims really are. That is, if an experienced business law firm does not think enough of your case to fund the litigation on a contingency-fee basis, you should strongly consider whether it makes sense for you to fund the litigation on an hourly basis.

• How do you structure the contingency-fee contract?

Once a law firm has agreed to accept a case on a contingency fee, the parties must enter into a written agreement establishing the percentage of the recovery that will go to the law firm and who—the client or the law firm—will be responsible to advance the hard costs of the case.

The first thing to know regarding contingency fees in business litigation is that they can vary from case-to-case. And the goal of both the client and the law firm should be to try to tailor the fee arrangement to the risk profile of the claims. For instance, in some cases, it may be a good idea to utilize a tiered fee arrangement, where the client pays a lower percentage if the case resolves early in the litigation, but the fee increases as the case progresses to reflect the law firm's increased time and cost expenditures.

In lieu of a true contingency-fee arrangement, a client may be offered a "hybrid" fee structure, where a law firm receives a reduced hourly rate plus a contingency fee. At first glance, this structure may seem like an enticing option, and it is often pitched as a way to pay "lower" out-of-pocket fees while retaining more of the recovery. In practice, however, hybrid fee arrangements often fail to provide the expected benefits.

Lawyers on a hybrid model often approach the case like a traditional hourly engagement, so the client may not receive the inherent efficiencies of a contingency-fee structure. Moreover, unlike full contingency-fee arrangements, the law firm working on a hybrid does not bear the financial risk of an unsuccessful result, yet it still reaps the rewards of a successful recovery. This "you win/I win, you lose/I win" fee structure often leaves clients with unsatisfactory results and a bad taste in their mouth.

Clients should also consider who is paying the hard costs of the case. Due to the inherent complexity of business litigation cases, costs can often reach into the hundreds of thousands of dollars. Consequently, clients should try to find a law firm that will advance at least a portion of those expenses on their behalf.

While clients may be advised to get litigation financing to pay costs, this approach suffers from similar problems as the hybrid-fee structure. With litigation financing, law firms have a reduced incentive to stringently control expenditures when they are "billing" the fees and costs against a pool of litigation funding. Further complicating matters is the high return that litigation funders expect on their investment, which can often result in the client paying back several multiples of the actual costs. Ideally, businesses should try to work with a law firm with enough resources to avoid the paying a windfall to litigation funders.

• Contingency fees and the recession.

Contingency-fee arrangements have traditionally been popular with small businesses, start-ups, or litigants facing a much wealthier adversary, but due to the financial impact of the pandemic, they are gaining broader popularity. Many companies with strong legal claims are simply not in a position to fund litigation right now or, even if possible, have determined it would not be financially prudent. Contingency representation allows these businesses to prosecute a claim and recover the funds needed to get through these trying times.

The first step is to speak with counsel that handles business cases on a contingency and determine whether your case is well-suited for such an arrangement. This conversation should generally occur at the outset of litigation, but you can also switch to a contingency-fee structure during a pending lawsuit. Even before the economic downtown, it was not uncommon for litigants to shift to a contingency-fee model midstream when the costs of litigation became overwhelming.

A contingency-fee structure is not right for every case or every client, but it is important for businesses to know that the option is available. Parties with strong claims should not have the courthouse doors shut on them due to the high cost of litigation, and contingency fees are one way that businesses can adapt to confront our current economic challenges.

William B. Lewis in West Palm Beach and Benjamin A. Webster in Orlando are co-managing partners of Morgan & Morgan's business trial group.