Should Case Expenses Be Deducted Before or After the Attorney’s Fee?
There is a sentence in a personal injury fee agreement that may be worth thousands of dollars to the client.
It will not necessarily look important. It may be surrounded by definitions, legal terminology, and paragraphs discussing matters that seem far more consequential.
The sentence explains whether case expenses are deducted before or after the attorney’s contingency fee is calculated.
That order matters.
Attorney fees and case expenses are different
The fee compensates the attorney for legal services he or she provides. It is commonly calculated as a percentage of the fund recovered for the client.
Case expenses are the amounts spent to develop and pursue the claim. Depending on the case, they may include filing fees, medical-record charges, deposition expenses, expert-witness fees, investigation costs, exhibits, transcripts, and other litigation expenses.
Many personal injury firms advance these expenses while the case is pending. That can be enormously valuable. An injured person may have no ability to spend thousands—or, in a complex case, tens or hundreds of thousands—of dollars developing a claim.
But advancing an expense does not mean absorbing it.
The fee agreement between the client and the personal injury attorney should explain how the firm will be reimbursed and what happens if the case does not produce a recovery.
Pennsylvania’s rules require a written contingency-fee agreement to identify the litigation and other expenses that will be deducted from the recovery. The agreement must also state whether those expenses will be deducted before or after the contingency fee is calculated.
There is a reason the rule requires that distinction. The two methods produce different results.
Method one: Calculate the fee first
Suppose a case settles for $90,000.
Assume the contingency fee is one-third and the attorney has advanced $10,000 in case expenses.
If the fee is calculated from the gross recovery, the calculation looks approximately like this:
Recovery: $90,000
Attorney’s fee: $30,000
Reimbursement of expenses: $10,000
Client’s remaining recovery: $50,000.
The attorney’s percentage is calculated using the entire $100,000. The expenses are then reimbursed from what remains.
Method two: Deduct expenses first
Now use the same case, the same recovery, the same one-third fee, and the same $10,000 in expenses.
This time, deduct the expenses before calculating the fee:
Recovery: $90,000
Expenses deducted first: $10,000
Amount used to calculate the fee: $80,000
Attorney’s fee: $26,400
Client’s remaining recovery: $53,600
The client receives approximately $3,600 more under the second method.
Nothing changed about the quality of the representation. Nothing changed about the amount recovered. Nothing changed about the expenses.
Only the order of the arithmetic changed.
Why does the order affect the client?
Think of the recovery as a pie.
Under the first method, the attorney’s percentage is cut from the entire pie. The expense reimbursement is then taken from the client’s remaining portion.
Under the second method, the expenses are removed first. The attorney’s percentage is calculated from the smaller pie that remains.
This is not the world’s most exciting mathematical concept. It is also not complicated once someone points it out. But it can have a substantial effect on the client’s net recovery and the funds on hand as needs continue to arise.
“Net recovery” is the number that matters.
The headline settlement amount may be $100,000, $500,000, or $1 million. The claimant does not receive the headline amount. The claimant receives what remains after attorney fees, expenses, medical liens, reimbursements, and any other required deductions.
The effect grows with the size of the expenses
In a relatively simple claim, expenses may be modest, and the difference between the two methods may not be dramatic.
In a complicated product-liability, medical-malpractice, or catastrophic-injury matter, the expenses can be much larger. Experts may need to inspect equipment, reconstruct an accident, analyze medical care, prepare reports, sit for depositions, and testify at trial.
The larger the expenses, the more consequential the calculation method may become.
Suppose the recovery is $1 million and the case expenses are $150,000.
With a one-third fee calculated before expenses, the attorney’s fee would be approximately $333,333.
If the $150,000 is deducted first, the fee is calculated on $850,000 and would be approximately $283,333.
That is a difference of $50,000. Not peanuts. Not insignificant.
Again, the only change is the order in which the fee and expenses are calculated.
What should a claimant ask before signing?
The first question is direct:
“Are case expenses deducted before or after your fee is calculated?”
Then ask:
“Can you show me an example using a $100,000 recovery and $10,000 in expenses?”
An attorney or firm should be able to walk through the arithmetic. Pennsylvania also requires the lawyer, when a contingency matter ends, to provide a written statement showing the outcome, the amount remitted to the client, and how that amount was determined.
Other useful questions include:
Which expenses might be charged to the case?
Does the firm need client approval before incurring a major expense?
Is interest charged on money advanced by the firm?
Is the client responsible for expenses if there is no recovery?
Can the expense provision be negotiated?
Will the fee percentage increase if a lawsuit, trial, or appeal becomes necessary?
The answers should be found in—or added to—the written agreement.
Why might a lawyer prefer the fee-first method?
The obvious answer is that it produces a larger fee.
That does not make the arrangement improper. The attorney may be advancing the expenses, carrying the financial risk for years, and receiving nothing if the case fails. The overall agreement needs to be considered in light of the services, risks, and circumstances.
Paul’s Guide is not based on the proposition that personal injury attorneys are charging too much merely because they use a particular calculation method.
The proposition is simpler: the claimant should know what the method is before agreeing to it.
An informed client may accept the proposed terms. The client may ask for different terms. The lawyer may agree or decline.
That is what an informed contracting process looks like.
The practical conclusion: do not stop reading a fee agreement after you find the percentage.
The percentage tells you only part of the story. Find the section governing litigation expenses. Determine whether they are deducted before or after the attorney’s fee is calculated. Ask for a numerical example.
A few words in the agreement can change the client’s recovery by thousands of dollars.
That is not fine print. That is money.
General information—not legal advice. Paul’s Guide is not a law firm. This article provides general educational information and may not address every fact, exception, jurisdiction, or change in the law. Legal rights and deadlines vary based on the circumstances and applicable law. Reading this article, by itself, does not create an attorney-client relationship with Paul’s Guide or Paul Zimmerman. For advice about a specific claim, promptly consult a lawyer licensed in the appropriate jurisdiction