Paying for Litigation
Lawsuits can be very expensive! This is especially true in the United States where the discovery process may require a team of lawyers to review a mountain of documents and interview numerous witnesses. So who pays for lawsuits?
Generally speaking, each side pays for its own attorneys’ fees and costs, but various rules and arrangements sometimes vary these burdens to make litigation accessible to people and companies who don’t have deep pockets.
Why should you continue to read this post about paying for litigation?
You need legal representation for a lawsuit, but you want to know whether you need to pay for it all yourself
You’re enjoying it and you want to see where it goes
You want to join the exclusive minority of the population who has read all of this post
Most Litigants Pay Their Own Fees, But May Sometimes Be Reimbursed
Under the “American Rule,” plaintiffs and defendants usually pay for their own lawyers, even after one of them prevails. This is why parties often settle cases: no one wants to spend more on legal fees than they recover or than the amount of a judgment they avoid.
But in some situations, a prevailing litigant may recover their attorneys’ fees from their adversary.
One type of situation that allows this is where the plaintiff prevails on a claim governed by a statute that permits her to recover her attorneys’ fees. For example, an employee who wins a lawsuit against their employer for a violation of the Fair Labor Standards Act can recover a reasonable amount of attorneys’ fees in addition to her other damages.
Another “fee shifting” situation is where the dispute arises from a contract in which the parties agreed that the prevailing party in a dispute about the contract may recover her attorneys’ fees.
And, in some limited circumstances, a litigant may recover some of her attorneys’ fees as a punishment against her adversary, pursuant to rules like Federal Rule of Civil Procedure 11(c)(4), when the adversary has violated the rules of litigation.
But litigation is unpredictable (note to self: tattoo idea?) and so a party may not actually get reimbursed for her attorney’s fees, even in one of these situations. This may be because the judge decides the fee-shifting rule does not apply or because the case settles before a judgment and the settlement does not include fee-shifting.
Contingency Attorneys and Litigation Funders Pay For Some Lawsuits
Some litigants do not have the money to pay for a commercial lawsuit, even if they may eventually be reimbursed. Most such litigants are out of luck. But for a small number of parties, three types of organizations may pay for their litigation costs.
Contingency lawyers may represent a plaintiff for no fee (or a reduced fee) during the lawsuit, instead accepting a portion of the recovered amount (usually around one third) as compensation. But because litigation is unpredictable (note to self: band name?), lawyers generally only take on contingency cases when they believe the likelihood of success and the amount at stake is very high or when they can process cases at a very high volume so that the revenue from the successful cases can offset the unsuccessful ones.
Litigation funding organizations provide a similar service as contingency lawyers. These organizations take money from investors and use it to pay lawyers’ fees for a case in exchange for a portion of the amount recovered (sometimes about 5 times as much as the investment). As with contingency lawyers, funders look for cases where the likelihood of success and the amount at stake are very high.
Lastly, public interest organizations may litigate cases on behalf of clients because the organization believes in a principle at issue in the case. For example, the conservative organization the Alliance Defending Freedom defended a Colorado business for free in litigation arising from its denial of equal treatment to its customers. Or a lawyer may represent a client for free (“pro bono”) for a variety of reasons, including a desire to contribute to her community.
Some Contracts Require Third Parties to Pay for Litigation
In some situations, a litigant may have a contract with a third party that requires the third party to either reimburse it for its legal expenses (an “indemnification” agreement) or confer upon the third party the “duty to defend” and hire the lawyer herself. The American Bar Association published a helpful article on this subject.
This obligation often arises in insurance agreements, in which an insurance company promises to either indemnify a policy holder for her legal fees in a lawsuit arising from an incident covered by the policy or to pay for the lawsuit directly. It also may arise in the context of a corporation that has internal rules requiring the company to pay for the legal defense of an employee or director who is sued in connection with their work.