MS: So along comes the plaintiff lawyer, who’s willing to take a case on a contingent basis. So the contingent-fee contract is crucial to bring the life to our seventh amendment rights. And under a contingent-fee contract, the law firm agrees to prosecute the case for as long as it takes. They agree to advance all the expenses necessary to prosecute the case. And they agree to only get paid if and when there’s an actual settlement or verdict paid. And then they normally get their expenses back. And then they split the award, typically, one-third to the law firm’s legal fees, and two-thirds to the plaintiff.
MS: So as important as the seventh amendment is, if there were not lawyers willing to take a case on a contingent-fee basis, the seventh amendment really wouldn’t mean much to most of us; because yeah, the right’s there, but how do you get to the courtroom? You need a lawyer, and most people can’t afford to hire them. So thankfully, these lawyers are very brave. They’re very entrepreneurial, if you will. They take on great risk, because in a law firm, of course, you have employees, and payroll, insurance, and taxes, and utilities, and rent. Those all have to be paid. And yet, you’re signing up cases on which you’re not receiving hourly fees. You’re having to wait and get paid maybe 18 months, 24 months, three years later.
MS: So it’s a very, very challenging business model, if you will. They face many challenges. From a capitalization standpoint, first of all, generally speaking, a law firm cannot sell stock in its business. So if my business partner and I wanted to grow Advocate even faster, and we wanted to raise growth capital, we could go out, and sell stock, and bring other investors into the business. This would allow us to take that capital and then ramp the business up further. And those investors would share with us in the profits and losses on a pro-rata basis. Well, only a lawyer can own a law firm. So law firms are not able to go out and sell equity or receive growth capital from outside investors, so that’s one way that they’re constrained from a capitalization standpoint.
MS: Secondly, most banks really don’t understand the contingent-fee contract to be a true accounts receivable. So in a service business, let’s say you’re a plumber, you do some work, you send an invoice to your customer, and they pay you. Well that plumber, if they had a lot of invoices, could take those to a bank and say, “These are my accounts receivable. I’ve done the work. I’ve billed my clients for them, and I expect to collect these dollars over the next 30 to 60 days.” A bank would recognize that as a true gap, rated receivable, and might be willing to allow that plumber to have a business line of credit based upon the receivables. Well, if you think about a contingent-fee lawyer, when they go to the bank and say, “I’d like a loan based upon my receivables,” the banker says, “Okay. Let’s see your receivables.” And they’re expecting to see invoices.
MS: Well, what they show them is, “Well, I have these contracts. And these contracts with my clients will enable me to get paid eventually when we win the case. Of course, if we lose the case, we don’t get paid at all.” Well, the banker says, “Wow. We don’t know how to put a value on that.” In a worst-case scenario, if something goes wrong, they don’t know how to liquidate that. And they will typically say, “Let’s just put a lien on your house.” So access to bank capital for contingent-fee law firms is constrained in this business, in this country, because banks don’t recognize the contingent-fee contract to be a valid receivable.
MS: So these are some of the challenges that plaintiff lawyers face. They also face a big, uphill battle when it comes to public relations, right? So you’ve seen some cheesy commercials on TV, probably late at night. There are some lawyers that make really bad commercials. And unfortunately, that casts a bad shadow over all plaintiff lawyers. But there are about 90,000 plaintiff lawyers in the country, and a very small percentage ever make it to TV. So there’s a reputational issue that they face, just in life and in hiring people to come work with them. There’s this idea that they’re all ambulance chasers. So what we’ve done at Advocate is, first, understand, in a very deep way, what they do; we appreciate what they do. And then we’ve designed a very specialized, kind of niche product to help them with a particular aspect of capitalization. So we’re not a one-size-fits-all. We are targeting the case expenses that a law firm has to spend to prosecute a case.
MS: So if they’re going to prosecute a case to the trial level, there are going to be expenses along the way. So they’ll have to ask for medical records. That costs money. They may have to hire expert witnesses. They may have to write a check for $10,000 just to get an expert to review the file. There will be deposition expenses, travel expenses, trial exhibits. And generally speaking, a rule of thumb is that if a case is going to be worth a total of $100,000, it’s going to cost a law firm about $10,000 to prosecute that case. So I mentioned before, there are all the issues with overhead and not getting paid. It’s even worse than that because they have to come out of pocket for the hard case expenses required to prosecute a case.
