June 1, 2020
You are the general counsel, CFO, or even CEO of a business engaged in litigation, or with potential litigation you could bring. Budgets are tight, and your capital needs to be conserved. You have probably read enough articles about the “death of the billable hour” and the rise of alternative fee arrangements to fill a book. You have probably been pitched to by law firms that say they can be more efficient or offer fee discounts for repeat business. Those developments in the legal market are good, but they are not enough. The lawyer-client relationship has two parties, and your legal costs will never be managed efficiently unless the client side—your side—is properly incentivized. Achieving this will require a paradigm shift from thinking about litigation as a cost and a burden, to thinking about it as an investment and an opportunity.
You might think that you are already properly incentivized. You want to keep litigation costs down and to maximize recoveries and minimize losses. You want to win your cases. But are such general incentives enough to ensure efficient outcomes in the actual decision-making process? Winning isn’t a goal until you define what winning means, and your in-house departments are also focused on other, more concrete, goals. After a decade of litigating cases for and against large corporations, I believe that far too often incentives are pushing companies in the wrong direction.
To see if I am right, I’d like you to think about how you approach three choices. Are you approaching them in a way that incentivizes efficiency in your legal costs, or not? The three choices are: fees v. resolutions, judgments v. settlements, and people v. costs.
Fees v. Resolutions.
Think about how you account for fees and resolutions (whether judgments or settlements) in your accounting and in your management decisions. Many companies treat legal expenses as a regular cost for which they budget. Resolutions, however, are treated as one-off events. You can see this most clearly in the litigation budgets your get from your outside law firms, which often do even contain anticipated or goal resolution amounts or dates. When a future resolution is accounted for, it’s usually to manage the risk of loss—perhaps as a disclosure in an SEC filing or in the form of a fund that has been set aside to protect against a large potential judgment. No other business unit would operate this way. No production budget fails to include anticipated sales. No investment budget fails to include anticipated returns.
The reason no other business unit operates that way is obvious: businesses are supposed to pay attention to the bottom line. Somehow, litigation has become exempt from that mantra, with the process budgeted for and the outcome not. That makes no sense. If you can pay more legal fees for an appropriately increased chance of a better resolution, you should. If you can avoid sufficient future fees through the right resolution now, you should. Your incentive structure should account for that and not treat resolutions as special.
You might think that litigation resolutions are too uncertain to include in budgets and to be subject to incentive structures, but that is dead wrong. A decade of litigation funding in the United States, and an even longer track record in Australia and the United Kingdom, demonstrates that litigations are just another kind of investment with another kind of pay-off structure and risk profile. Those of us in the litigation funding industry make these judgments every day, and back them up with millions of dollars in capital on which we expect a return. There is no reason your business needs to be left out of the increasing focus on efficient litigation investments.
Judgments v. Settlements.
Think about who owns the responsibility for judgments and settlements. Many companies internalize the process of settlement approval. It might be a committee, or it might be an individual, but a settlement decision often requires an in-house judgment call. Internal accountability and responsibility for such judgment calls can be avoided when a company opts to proceed to trial. In those cases, the credit or blame can be placed on outside counsel or the courts, or even just to the vagaries of fate. Many legal departments’ incentive structures thus create a preference for judgments.
That may sound counter-intuitive when so many cases ultimately do settle. There are, of course, many incentives that push towards settlement, and the case resolution statistics back that up. But taking a closer look at when settlements happen suggests skewed incentives. Settlement typically happens late—often on the eve of trial. In many cases, this is because companies require a significant, imminent risk of loss before someone assumes responsibility for a settlement decision.
The months leading up to trial are often extremely expensive because law firms legitimately need to perform a lot of work in the lead up to trial. At the same time, your risk profile as you get closer to trial often isn’t significantly changing. You are spending money on trial preparation, therefore, for not benefit. Sometimes the risk profile does change and you do need to wait for a critical summary judgment, discovery, or similar ruling before settlement makes sense. But when that is not the case, or when the case proceeds intensively for months after that critical decision, you are wasting money. Again, thinking of litigation as an investment helps to shift focus to the value of time and the costs of delay. Correcting for irrational incentives to delay rational settlements would help you get your resolutions faster, reduce your run costs, and measurably increase your litigation returns.
People v. Costs.
Finally, think about how your team makes the decision about whether to agree to search an executive’s documents or offer them for a deposition. The legal fees that have been used to defend executives from depositions that everyone (except, perhaps, the executive herself) knows they will ultimately have to sit for could fund a whole new business line. It is natural for your team to want to protect the executives in your company, but sometimes bitter pills need to be swallowed. If your in-house team believes that its job is to defend executives, you will keep wasting money on doomed motions and delaying resolution of your litigation. If your in-house team believes their job is to protect one of your companies’ assets—a litigation asset—the calculus may be different.
I don’t pretend to be neutral in this discussion. Even while I was still litigating, it was funders who opened my eyes to some of the ways in which clients were losing out on their best results. Now that I work for a litigation funder, I am even less neutral because we want to fund your plaintiff- and defense-side litigations. If you view litigation as a manageable asset, it will be easier for us to demonstrate how funding can unlock value. After all, we believe that we are experts in structuring litigation to align everyone’s incentives to efficient resolution, and in identifying the value of a case and helping companies and law firms maximize it both at initiation and throughout the life of the litigation as we monitor the case. But my hope is that these insights are helpful for any company looking to manage litigation costs regardless of whether you come to us for funding.
This article is reprinted with permission from Corporate Counsel Magazine