News: Giving Clients Their Money's Worth

By Mark Thompson

When Time Warner and AOL merged last year, the New York megafirm of Cravath, Swaine & Moore handled the legal work under a fee arrangement more often seen in a simple slip-and-fall. If the complex deal worked out (as it so happened), the firm would collect according to press reports — a whopping $30 million. If the merger had fallen through, Cravath would have walked away with a lot less.

Akin to contingency representation, this sort of arrangement is called a "busted-deal" fee. In these tough economic times, when clients are paying closer attention than ever to their legal costs, it is becoming increasingly common, particularly in mergers and acquisitions and corporate finance work. The lawyers, in effect, assume some of the risk that a deal might collapse, giving their clients greater assurance that they'll get their money's worth.

Not everyone thinks it's such a great idea. Michael Morris, general counsel for Sun Microsystems Inc., observes that some of the hardest work for lawyers is on deals that don't work out while some of the easiest work is on deals that sail through. So neither the busted-deal discount nor its corollary, the "success premium," makes sense to Morris, who prefers old-fashioned bills based on an hourly rate.

Small firms and solo practitioners have little use for "busted-deal" fee agreements anyway. They don't handle big-dollar M&A work, nor do they have the cash reserves to bankroll complex civil litigation on a contingency-fee basis. But some smaller firms have begun to give their clients a promise that has the same effect of assuring them that they'll get good value for their legal fees. It is the familiar — though not in law practices — money-back guarantee.

Ungaretti & Harris, with offices in Chicago and Washington D.C., was the first law firm to offer a written guarantee. "We GUARANTEE that as a client of Ungaretti & Harris you will receive COST-EFFECTIVE legal services delivered in a TIMELY manner," the promise declares, with the key words set off in all-caps. It goes on to advise clients that if they raise concerns in a timely manner, the firm "will resolve the issue to YOUR SATISFACTION, even if it means reducing your legal fees."

What's a lawyer to do if a client abuses the offer by concocting a complaint to dodge a bill?

That hasn't happened to Ungaretti & Harris in the five years since the firm announced the policy, says managing partner Thomas Fahey. "We've been fortunate that the guarantee has not been abused. But it has been called into play and it has been the genesis of some constructive dialogue with certain clients. We have been able to work through to a mutually agreeable resolution," he says.

What clients like most about the policy, Fahey adds, is the assurance that the firm is open to communicating with them. "The service guarantee really helps to break down the barriers to talking about fees and ultimately the client's satisfaction wit the service they have received," he says.

Mark Thompson, who has a law degree, is a Los Angeles-based journalist specializing in business and law. He has written for many publications including the Wall Street Journal, Los Angeles Times, New Republic and Atlantic Monthly.