Evaluating and managing litigation risk

By: Dr. Donald E. Vinson July 29, 2015

inside-counsel LogoThis article was first published in Inside Counsel and can be found here:

One of the key duties of legal departments is evaluating and managing risk, particularly around litigation funding. Yet when it comes to litigation, many in-house counsel lack the tools to perform these functions. Fortunately, there are a growing number of resources, technologies and methodologies to help in-house counsel and their clients weigh the risks of pursuing litigation in order to unlock the value of legal claims.

In the first article in this three-part series, we will explore how in-house counsel can understand the tools and technologies that are available and bring these tools to the table to assess litigation risks.

Quantifying What Used to be Unquantifiable

Companies have divergent views about pursuing litigation. Some clients want to prosecute every matter where they think they have been wronged or see even the slightest possibility for economic gain. Others may be so skittish about litigation that they prefer to not pursue meritorious claims, because they don't want to incur risks or assume the resource-intensive process of litigating. However, neither approach is feasible. Aside from finite resources and potentially exorbitant costs involved with pursuing matters, in-house counsel often struggle with determining the value involved in contractual matters, IP issues and other potential lawsuits. This entails understanding the probabilities of potential outcomes given the uncertainties inherent in litigation and balancing potential recoveries against significant hard costs.

The legal department is often unique within companies when it comes to decision-making processes. Other departments quite often have tools and procedures to conduct financial and risk analysis, predict the rate of return on a new product line or other business venture and assess the potential profitability of such undertakings. With these types of tools, the CFO, chief marketing officers and others in the C-suite have moved away from subjectivity to objectivity when evaluating and managing risk.

However, these types of tools have not traditionally been available when it comes to evaluating litigation. Unlike many of their business colleagues, in-house counsel must spend a great deal of time putting out fires or engaging in activities that prevent fires from breaking out. While these are essential functions, legal departments have often sacrificed more proactive and strategic undertakings. It's not simply a lack of tools, either. Legal departments of all sizes, under increasing budgetary pressure, rarely have the opportunity to develop and execute a strategic approach to unlocking the value of litigation-related assets.

Companies also need to look beyond conventional wisdom, legal lore and past experience. While there may be a tendency among lawyers to think they know how juries will act and react to specific types of cases, those preconceived notions are often not accurate. These deeply held, if flawed, beliefs can lead companies to pursue cases they shouldn't and shy away from cases they should take to trial.

Inaccurately assessing risk can be expensive. Consider a real case that involved significant damages claims. The plaintiff seemingly prevailed when the jury found the defendant liable and awarded $10 million in damages. However, the plaintiff was seeking a $100 million recovery for alleged losses along with further sums for punitive damages. The plaintiff had failed to conduct a risk/reward analysis, had not properly assessed the probability of different outcomes and did not weigh the potential recoveries and their corresponding probabilities against the costs of pursuing what was clearly going to be a very lengthy and exorbitantly costly litigation. Having the verdict and damages award overturned on appeal further illustrated the plaintiff's failure to understand the risk involved in litigating this particular claim.

Since legal departments don't have the resources to develop sophisticated tools for evaluating litigation risk, they can turn to third parties, such as trusted litigation funding companies that can objectively do so. Third parties have the experience to conduct rigorous due diligence to determine which matters are worth pursuing. They are also not emotionally invested in the dispute, so they are better positioned to undertake an objective review and accurately assess which claims have potential value and which represent more risk than reward.

Litigation is often an emotional, uncertain venture. However, there are tools and metrics that companies can use to determine whether the risk involved with specific matters represents a worthwhile pursuit. Such tools not only consider the costs of litigation, but they also take into account how judges, juries and others involved in the process will see the case. This requires an analytical, objective approach that doesn't hinge on emotional or cultural baggage. In-house counsel need tools to help them understand what is likely to happen, based on scientific analysis. This perspective will allow them to make better informed, strategic decisions about client assets while minimizing the risks and maximizing the potential returns.

In our next article, we will provide advice and guidance to in-house counsel on the tools that exist to evaluate and manage litigation risk.