Risky Business

Speaker’s Corner From The Practice September/October 2019
Stephen D. Susman on contingency fees and litigation funding

Stephen D. Susman, a founding partner at the law firm Susman Godfrey and a member of litigation finance firm Bentham IMF’s advisory panel, recently sat down with David B. Wilkins, faculty director of the Harvard Law School Center on the Legal Profession, for a conversation on litigation finance and its impacts on the wider legal profession.

David B. Wilkins: You have founded a very successful and particularly innovative firm—a combination plaintiff and defendant firm of a kind we hadn’t really seen before. Of course, now many people have emulated it. I want to start out by asking about you, with the plaintiff hat on, how do you think litigation finance is shaping the plaintiff’s industry?

For law firms, third-party litigation funding has become another way to fund and compete for cases without all the risk.

Stephen D. Susman, a founding partner at the law firm Susman Godfrey and a member of litigation finance firm Bentham IMF’s advisory panel

Stephen D. Susman: My firm, Susman Godfrey, started 40 years ago as really the first commercial litigation funding firm in the country. That’s what we did. We were litigation funders in the most literal sense. We handled cases on a complete contingency basis, and we advanced the expenses on good commercial cases, all for a big piece of the action, and we had skin in the game in all these cases. Large firms couldn’t compete with us because they were unwilling to risk everything—unwilling to serve as the bank—and as a result, plaintiff’s firms like mine (many others followed quickly after us into the commercial space) were very successful.

At the same time, over the last 40 years—I view this whole story holistically—the politicians in Washington and the conservative legal establishment in this country have been trying to reduce the amount of litigation by withdrawing or canceling causes of action and by making it harder to go to trial. So now, plaintiffs have all these hurdles to overcome. This has reduced the number of cases and the number of claims that can be brought.

This brings us to this idea of litigation funding as, in its more recent iteration, a potential solution to these issues in the justice system. While it is true that this background has affected both sides of the docket—both the plaintiff side and the defendant side—for law firms, third-party litigation funding has become another way to fund and compete for cases without all the risk. Litigation funders, insofar as I’m concerned, have facilitated my competition, which of course I’m not happy about. But the fact of the matter is now the big firms can compete with me because they have a litigation funder who is willing to pay 50 percent of their hourly fees. But to pay 50 percent of the hourly fees of many large law firms is like going to Barneys and buying a suit for 50 percent off—it’s already been marked up four times! Indeed, some litigation funders will use a 50-50 model with law firms. The law firm bills 50 percent of their hourly rates, the law firm and the funder each get 20 percent of the amount of recovery, and they want the client to pay out-of-pocket expenses so the client will have skin in the game. Frankly, to me, for them to then claim that this is helping the poor client bring a case is not true. It’s helping the large law firms get into a space that they need to get into, or at least a space they think they need to get into, to attract young lawyers to come work for them, to increase their income, or whatever it is. It’s not to help the clients bring cases they could not otherwise have brought. The clients could have brought these cases. In my view, that’s what this new wave of litigation funding has done. It has made it possible for the big firms to operate on the plaintiff’s side of the docket even when they are unwilling to take the entire risk.

Now, the question I ask is: Has litigation funding actually increased the ability of people who are injured or small businesses to have access to justice? I don’t think so. I could be wrong—I don’t know what empirical research has been done on that. It allows clients to have a wider choice of counsel, for sure. But is that really what they’re dying to do? I understand it’s what the big firms want them to do, but does it mean that these people can’t find good lawyers to go to court who would be willing to take all of the risk? I don’t know the answer to that. My notion is that the more skin in the game you can give to the lawyers by putting them at risk, the better it is for the system of justice because we want only good cases to be filed. If people get paid only when they win, winning is going to be the metric of filing cases.

Most cases depreciate in value from the day they walk into the office.

Now, the litigation funders argue—and they have a point—that, well, they have skin in the game now, too. There are two sets of eyes looking at the merits of a case: a big law firm’s intake committee has their people looking at it, and the litigation funders have their own lawyers looking at it. And the litigation funders are proud of the fact that the trial lawyers who have gone to work for them and their top executives have trial experience and they have their own teams of lawyers evaluating lawsuits that they lend money for. But I also worry whether litigation funding has allowed the filing of some cases that should not be filed.

Wilkins: That raises a number of issues, and I want to follow up on that because these types of arrangements seem to be trending in the industry right now. The movement is toward not just funding individual cases but funding portfolios of cases, taking all the cases in a certain area or a portfolio of cases against a certain defendant. I wonder if you think that might actually exacerbate some of these issues you’re talking about.

Susman: I do. Our firm is not in the mass torts area, where you have a financier coming in with some lawyer who’s not really going to try these cases but instead will accumulate them, maybe refer them somewhere else for a referral fee, and lend them money on this portfolio of cases so that they have enough money to go advertise and get more cases for their portfolio. Where I have expertise is in the big commercial cases—individual cases where the deal is not with a law firm but with the client. And we have used certain aspects of litigation funding. Frankly, we use litigation funding primarily when the client cannot pay expenses. At the same time, we do think it is important that someone other than us has skin in the game on these cases. We tend to tell these clients, “It’ll be 100 percent contingent fee, but for the out-of-pocket expenses, which in these patent infringement cases or antitrust cases can run into several million dollars per case, we really think you should go get a litigation funder to advance these expenses and go make the deal with them. We’re not going to get involved with the deal. We’re not going to sign any papers. We’re not going to negotiate your deal. We’re not going to give you any advice on it. But there are litigation funders who will allow you to pay your own expenses so you still have some skin in the game.”

Most cases, in my experience, depreciate in value from the day they walk into the office. They don’t go up in value—they all go down in value. And the key is to get ones that are so good that when the depreciation is over, you still have better than a 50 percent chance at winning. There are some cases where that obviously doesn’t happen. Two years, three years down the road, the case doesn’t look so good as it did when it came in, and the case should not be tried because the odds of winning are too small. If the client has no skin in the game and it costs them nothing to go to trial, and even though the chance of winning is 5 percent or 10 percent, clients will make you go try the case. That’s why our firm is so insistent that we don’t want to advance the expenses of litigation. We’d like you to go to a funder to get that, but on the cases we do take, we’re totally willing to do it completely contingent.

Wilkins: I want to pick up on another thing you said earlier, which is another possible future for this industry. You rightly said that right now all the big litigation funders are hiring experienced trial lawyers to look at cases. But of course, one wonders whether what’s actually going to happen is what happened to fintech—that we’re going to start seeing predictions being made not by experienced trial lawyers but by artificial intelligence, machine learning, etc. I wonder, first, whether you see that moving in that direction, which would also affect who gets involved—for example, would Blackstone start moving into this or some of the big people who make other kinds of similar bets—and second, what that would do to the kind of issues that you are rightly raising about what this means for the litigation system and the justice system more broadly.

The contingent fee business on the plaintiff side is largely dependent on having a large volume of cases.

Susman: In my view, anything that allows either lawyers or funders to better predict the results in a case is to be welcomed. It is socially desirable. It’s desirable for our justice system. Anything that you can do that is likely to improve your ability to estimate the probable outcome is good. If the funders develop some artificial intelligence and algorithms to evaluate cases—terrific. I have no problem with that. Of course, they now have an incentive to do it, and that may be a good thing. Because a firm that does a lot of plaintiff’s contingency work or a funder whose total business is based on making bets on whether cases will be won or lost is probably going to be a better evaluator of the results than a large firm that takes one or two big contingency cases a year.

The contingent fee business on the plaintiff side is largely dependent on having a large volume of cases, because you don’t win them all. To make money out of it, you have to have a lot of fishing lines in the stream—not just one, because with one line you’ll never catch a fish. You need 20 lines in the stream, and the problem with the big firms is they tend to get only one or two big contingency cases at a time. Plus, what these firms often don’t recognize is that these cases take an awful long time. They’re very hard to win, and the firms don’t know how to efficiently handle them over all that time. You can make money out of cases if you don’t overwork them, but most of the large firms doing contingency cases are overworking them. They work them just like an hourly case. It’s understandable if they’re getting paid 50 percent of their hourly rates. In fact, that’s an incentive to just double the amount of hours. But often there’s also too many people attending depositions or too many people who make phone calls. Or you look at the number of lawyers who work on a case and there are 24 of them—and each of them put a little time in. And then, typically, the other lawyers in the firm get frustrated with their partners who have gotten the firm into these never-ending contingency cases because they’re not seeing any return money. Those partners that got them involved in the case, now on the outs inside their partnership, leave to go elsewhere. And now the firm is stuck with a case that’s been going on for three years, it’s eaten up a lot of time and money, the partners that brought the case in are no longer even there, and there’s no end in sight. You see that happen quite a bit.

Wilkins: As you know I’m a law professor, and one of our big goals is to try to help students prepare for the future. From your perspective, as you see the litigation finance trend growing (we just had a whole student-run conference on the topic)—and by all accounts, it seems to be growing here in the United States and around the world, on both the plaintiffs’ and the defendants’ side—what do you think we ought to be teaching students about this part of the bar? What difference might that make about how we ought to teach students, and what would you like to see out of the associates and young lawyers who are coming in and joining your firm?

Anything that allows either lawyers or funders to better predict the results in a case is to be welcomed.

Susman: My first thought is efficiency. One of the most important things that we have got to get back to is focusing on how we efficiently handle the public disputes. My firm’s goal is to handle it at the least cost with the least number of people working on it, the least number of hours spent on it, and in the most efficient way. Susman Godfrey began as sweet and lean. I don’t say mean and lean, because we’ve never been mean. In fact, mean lawyers are not so successful. The sweet and nice lawyers are successful.

What I would tell law students is they need to know how to write something with one draft—not multiple drafts, not 20 drafts going back and forth. We need to teach our students better how to talk to other lawyers and not just write to them. The emails that I see going from associates to lawyers on other cases are getting longer and longer, and that is a bad sign regardless of what they are saying. We all need to learn to be more efficient, and that can start in law school.

Wilkins: Well, Steve, I think you’ve already said if litigation financing is used on both sides and if the prediction methods get better, what you would hopefully see is people being better able to evaluate whether they’re going to win or lose and therefore have much more incentive to settle—and settle cases earlier. And as you said, that could be a good thing for everyone.

Stephen D. Susman is a founding partner at the law firm Susman Godfrey and a member of litigation finance firm Bentham IMF’s advisory panel.

David B. Wilkins is the Lester Kissel Professor of Law at Harvard Law School, vice dean for Global Initiatives on the Legal Profession, and faculty director of the Center on the Legal Profession.