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May 13, 2010 7:01 PM

THE AM LAW 100 2010: Alternative Fee Reality

Posted by Ed Shanahan

By Drew Combs from the May 2010 Issue of The American Lawyer


Reasonable people can disagree about whether alternative fee arrangements are good business, but one thing's certain: They can play havoc with a firm's Am Law 100 trend lines.

AL100Logo-128 Just ask Howrey chairman Robert Ruyak. In 2008, contingency payouts added $35 million to the firm's gross revenue, helping fuel a 20.3 percent increase over 2007. But in 2009, Howrey brought in just $2 million in contingencies--and the firm's gross revenue fell 16.2 percent, to $480 million.

Not all of the drop is attributable to contingencies, but the firm estimates that with contingencies excluded in both 2008 and 2009, its drop in gross revenue would have been about 10.9 percent. "Our swing in 2009 wasn't as great as it looked," Ruyak says. "When you add in the episodic income from the contingencies, it makes for a much bigger [difference]." In each of the past five years, Howrey's revenue per lawyer has risen or fallen by $70,000 or more, and in four of those years, the differential was more than $100,000. (See Peaks and Valleys graph below.)

Ruyak says that one of the ways in which the firm tries to mitigate these swings is to limit the amount of contingency or partial contingency work it takes on. In a typical year, Ruyak says, about 5 percent of the firm's billable hours are devoted to matters that are handled on a contingency basis. In 2009 that figure rose to 7.2 percent. Ruyak says that even with limits in place and years of experience with these types of billing arrangements, the firm is still in the process of "figuring out how to do them well."

Howrey was not the only Am Law 100 firm affected by alternative fees in 2009. In fact, contingencies helped push two Second Hundred firms onto this year's top hundred: Cozen O'Connor, which recorded a 23 percent increase in gross revenue, to $291 million, and Davis Wright Tremaine, where gross revenue rose almost 18 percent, to $276.5 million. Cozen's revenue per lawyer and profits per partner jumped 10.6 percent and 19.3 percent, respectively, while Davis Wright's rose 5.2 percent and 17.3 percent.

Another firm that got a boost from alternative fees was Fish & Richardson. President Peter Devlin declined to give details about specific matters but says that in 2009 the firm benefited from both full contingency cases (in which no hourly fee was charged and the firm got a piece of the recovery) and "hybrid" contingency matters (which were billed on a reduced rate and included a smaller piece of the recovery).

According to Devlin, the firm's contingency program has been in existence for about 15 years. "Some years it results in really decent recoveries for us," he says.

With chatter about contingencies, partial contingencies, success bonuses, and flat fees now in vogue, expect Am Law 100 trend lines to start showing a lot more zigzags. For some firms, it could be a bumpy ride.


PeaksValleys 

Click on the graph for an expanded view.

Click here for The Am Law 100 2010 - The Complete Report.

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