New York Changing Its Contingency Fee Formula

No-Win-No-Fee-SolicitorEver since the Great Flood swept over the earth in the days of Noah, or at least since I was sworn in 28 years ago, New York’s contingency fees formula in personal injury cases has remained static: Lawyers get paid their contingency fee off the net recovery, not the net gross.

And now that is changing.

A short tutorial for those who might not get the significance: If a case settles for $100, and the lawyers advanced $10 in expenses, then they first get paid back their $10 and the legal fee is calculated on $90. Thus, a $60 recovery for the client and a $30 fee for the attorneys if the fee was based on one-third of the net recovery. (Medical malpractice cases, while being far more difficult and complex, have lower fees.)

If, on the other hand, we were paid off the gross recovery, the client would be paid $66.67 and the attorneys’ fee would be $33.33. Then the client would pay back the $10 in expenses and net out $56.67.  The effect of compensating attorneys off the net was that the attorneys were paying ⅓ of the expenses of the litigation.

But New York’s second appellate department has now changed rule NYCRR § 691.20(e), which formally read that the fee:

shall be computed on the net sum recovered after deducting from the amount recovered expenses and disbursements for expert medical testimony and investigative or other services properly chargeable to the enforcement of the claim or prosecution of the action.

Now, however, counsel is permitted to give the new clients a choice of how they wish to do it. The clients can either front the costs themselves (which most are economically unable to do) and allow the fee to be calculated against the net, or the clients may elect to front the costs themselves and have the fee calculated against the gross.  Here’s the new rule: Contingency Fees in PI Rule Change

Is this good for clients? At first blush, some might say no because it means that the attorneys are no longer paying ⅓ of the disbursements — in the end the client is getting $56.67 instead of $60, in the example I used.

But in actuality, a great many cases aren’t so clear cut as to whether lawyers will take them or not because some are not financially viable by using the “net” formula. If there is only $25-50,000 in insurance, after all, and a lawyer thinks she may have to pay $5,000 – $10,000 in expenses, many will simply decline the representation.

We see this happen in medical malpractice cases all the time due to the low fees, resulting in the medical community enjoying de facto immunity for most acts of malpractice due to the very low legal fees we have in New York. While tort “reformers” claim this is a good thing, the real-world result is that the loss is then borne by the victims and taxpayers who must front the costs of the loss instead of the people or institutions responsible.

Word has it that the other three appellate departments in New York will soon follow suit with the altered fee calculation.

But one rule remains hard and fast and unchanging- when we lose we get zip. And we will also, most likely, be eating the expenses.

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9 Responses Leave a comment

  • Andrew Leder 2014.3.4 at 12:00 | Quote

    Hi Eric,

    You say in your post, “Now, however, counsel is permitted to give the new clients a choice of how they wish to do it. The clients can either front the costs themselves (which most are economically unable to do) and allow the fee to be calculated against the gross, or the clients may elect to front the costs themselves and have the fee calculated against the net.” I have two questions. First, don’t you mean the clients can either front the costs themselves and allow the fee to be calculated against the net, or have the attorneys front 100% of the costs and and have the fee calculated against the gross, after which the attorney recoups 100% of the expenses from the client’s piece, after which the client takes his share? Secondly, if the client agrees to pay the expenses himself, I assume the client gets 100% of those back, and the fee is then calculated on the net of that. Is there is no longer a two thirds/one third split under any scenario, that is, are expenses borne either by the client 100% or the attorney 100%? Or am I missing something here?

  • Eric Turkewitz 2014.3.4 at 12:11 | Quote

    First, don’t you mean the clients can either front the costs themselves and allow the fee to be calculated against the net, or have the attorneys front 100% of the costs and and have the fee calculated against the gross, after which the attorney recoups 100% of the expenses from the client’s piece, after which the client takes his share?

    Yes. Fixed.

    Secondly, if the client agrees to pay the expenses himself, I assume the client gets 100% of those back, and the fee is then calculated on the net of that.

    Yes. In other words, the same way it is now. Whoever fronts the disbursements (usually the attorney, but not always) gets the costs paid back before the fee calculation.

    Is there is no longer a two thirds/one third split under any scenario, that is, are expenses borne either by the client 100% or the attorney 100%?

    That is an interesting question. What happens if you start one way, and then the client wants to change mid-stream to the other way? What happens if the client elects to front the costs and then two years in realizes s/he can’t afford to do it anymore? I don’t have an answer to that question, unless at that moment the attorney reimburses the client for all the expenses and pays the rest of the way, changing a net fee situation into a gross fee one.

  • Andrew Leder 2014.3.4 at 12:39 | Quote

    Your “midstream” comment threw me. I’m still not clear. Assuming there is no change midstream, is it your understanding that under the new fee rule, there are only the following 2 scenarios:

    1) the client pays 100% out of pocket expenses as they are incurred (which to me is an unlikely scenario as you alluded to), and then gets 100% of these expenses back when case settles, after which attorney’s fee is calculated off the net;

    OR

    2) the attorney pays 100%, after which fee is calculated off the gross recovery and expenses and client’s share are recouped and distributed as I stated in my first comment;

    AND

    If there is no switch midstream, there is no longer a two third / one third sharing of expenses in New York.

    Thanks.

  • Eric Turkewitz 2014.3.4 at 12:54 | Quote

    Andrew:

    That is correct to my understanding, though this isn’t all that clear:

    the attorney pays 100%, after which fee is calculated off the gross recovery and expenses and client’s share are recouped and distributed as I stated in my first comment;

    And should read:

    the attorney pays 100% of the expenses. The fee (1/3) is calculated off the gross recovery. Then the client pays back the expenses from the remaining 2/3.

    And expenses are no longer shared.

  • Adam Nichols 2014.3.4 at 14:09 | Quote

    I’m unclear on whether this applies to (a) cases venued in the 2nd department, (b) attorneys located in the 2nd department, or (c) clients residing in the 2nd department. As long as the 1st & 2nd department have different rules, this is going to create confusion for lawyers in and around the city.

  • Eric Turkewitz 2014.3.4 at 14:19 | Quote

    I’m unclear on whether this applies to (a) cases venued in the 2nd department, (b) attorneys located in the 2nd department, or (c) clients residing in the 2nd department.

    I think it matters where the lawyers have their office, since those are the folks we must answer to if something goes wrong.

    But I agree it is unclear. Hopefully, the other departments will swiftly act so that we don’t have multiple sets of rules.

  • Warren 2014.3.4 at 20:37 | Quote

    I’m a little confused on how the NY rules worked before. In your first paragraph, you say “Ever since the Great Flood…Lawyers get paid their contingency fee off the gross recovery, not the net.” But it appears from the rest of the article & attached rule change that the fee used to be based only on net recovery. Am I missing something?

  • Eric Turkewitz 2014.3.4 at 22:48 | Quote

    Am I missing something?

    Yes. You a missing the fact that I typed/edited too fast and transposed the terms. It’s now fixed. Thanks.

  • Erik 2014.5.20 at 23:53 | Quote

    There’s also another interesting bit. The rule appears to give the client the choice – but the second choice states “in the event that the attorney agrees to pay the costs….” It does NOT require the attorney to pay those costs even under choice B. Am I the only one confused?

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