This article first appeared in The Future of Litigation, a supplement to the American Lawyer Magazine, Fall 2003.
ABSTRACT: Clients are exposed to the disciplines of the market. Why shouldn’t trial lawyers face the same sort of scrutiny?
Commercial litigation as practiced by large firms is inherently expensive. Even if the billable hour died tomorrow — and it has a rather long record of surviving rumors of its demise — litigation would still be costly. The adversarial process and the rules of discovery conspire to make litigation both time-consuming and laborious.
Litigation is also uncertain. Predicting outcomes is hard because lawyers must conduct substantial factual and legal research to assess the value of a case. This uncertainty also makes forecasting the cost of litigation difficult. Modern corporations, with their budgets and control systems, disdain the lack of predictability.
Up until now, technology has not changed the fundamental nature of litigation. Electronic evidence is increasingly important, yet lawyers often review it on paper, by hand. Even if e-discovery best practices are adopted and it becomes less expensive and more predictable, the underlying dynamics of uncertainty and high cost will remain in place.
There are signs, however, that the conduct of litigation is starting to shift. Technology will help drive the changes, but the changes themselves will be demanded by clients, who want to achieve better outcomes and reduce, control and more accurately forecast litigation costs. Some companies already use formal early case assessment (ECA) to gain control over litigation. ECA applies business discipline to legal disputes. A defendant, most often, will make a quick determination of the strength and potential expense of a claim, based on whatever information is readily available. This analysis helps business managers assess the risks and benefits of proceeding and decide how much to invest in legal and other fees to pursue or defend the case.
One example of ECA is formal risk analysis, particularly decision trees. A decision tree is a way of diagramming a case that shows key “tactical decisions,” such as claims to bring and key “chance events,” such as whether evidence will be admissible. The output of the risk analysis is a diagram that shows different “paths” a case could follow, the monetary value of each path, and the “expected value” of the case, which is a single dollar estimate of the value. This approach requires a numeric mindset – particularly specifying probabilities – that makes many lawyers uncomfortable. Another example, one that seems less driven by numbers, is the Dupont approach to ECA (as described at DupontLegalModel.com). It emphasizes early consideration of such factors as the client’s vulnerability, the potential to win, likely costs for third party services such as databases, creation of budgets, analysis of local rules, and the business strategy. Lawyers inside and out consider these factors to decide the overall case approach.
But why stop with early case assessment? Why not apply the similar discipline and structural approaches to analyzing law firm performance? For example, in-house counsel could adopt techniques that more formally incorporate measures of law firm cost-effectiveness and performance. It is even possible to imagine the introduction of third-party evaluators who will help clients decide whether to proceed with a case and which firm to retain.
There are at least two ways to measure firm performance. One is by quantitatively analyzing performance on prior matters. Readily available technology allows clients to capture firm billing data in digital form. By applying task-based billing codes to billing entries and by ranking the difficulty and complexity of matters, clients should be able to measure a law firm’s cost performance relative to its peers. Large companies might be able to rely on their own experience with law firms for this analysis but the better approach would be to consolidate data across multiple companies and law firms. Third party e-billing vendors such as Tymetrix, DataCert, and Examen offer such services. Of course, a law firm’s win and loss record, suitably adjusted (“normalized”) for the difficulty of the matter and likelihood of prevailing can also be considered.
There is a well-worn argument that this sort of analysis will never take root at the high end because large, high-stakes litigation is too variable. It is best left to the routine trips-and-falls portfolios of insurance defense firms. The naysayers are likely to be proven wrong in the long run. But even in the short run, these doubters can apply less quantitative approaches to evaluating law firm performance. More specifically, they can analyze how firms manage litigation.
Today, litigation is typically managed however the partner in charge chooses to manage it. Most partners lack formal litigation management training (whether from law school or continuing legal education). And they cannot turn to any rigorous analysis of alternative approaches or benchmarking studies for guidance – such studies are not typically available. It does not have to be that way. Firms can adopt documented best practices in litigation and in-house counsel can review these best practices and compare and contrast them across firms.
While it may be possible to define “best practices” for the entire profession, a reasonable starting point would be to start with a single, firm-wide best practice. This would be a set of procedures that a law firm adopts after consciously and systematically studying its own practice. Based on this study, the firm could identify its own best and most cost-effective approaches to handling both the overall matter and each component task of litigation. Just the act of in-house counsel demanding that firms submit documented best practices is likely to cause firms to more consciously manage how they conduct litigation. Particularly diligent in-house counsel might even consider auditing firm bills for compliance to documented practices.
As mentioned earlier, ECA and best practices are tools borrowed from the business world. Perhaps it is time to introduce another tool from the business world — one that would surely radically change the nature of litigation. Companies like Standard & Poor’s and Moody’s Corporation have been rating corporate bonds for more than 150 years. They have no financial stake in the bonds they rate; they charge fees to issuers and/or buyers for their ratings.
Perhaps it is time to think about rating legal disputes. Imagine a corporate client discovering he or she has a AAA claim with an upside of $500 million, or is defending the equivalent of a junk bond case. Creating a market in third-party evaluation could help corporate counsel determine which cases are worth pursuing and how large an investment to make in these cases, on either the plaintiff or defense side. Creating the Moody’s or S&P for litigation requires overcoming numerous obstacles of course. There would need to be measures in place to protect confidential information and the attorney-client privilege.
But if these obstacles could be overcome, litigation rating services could inject a health dose of efficiency into a market in search of a cure. Third parties would have financial incentives to develop techniques to minimize the cost of developing ratings. They would be well-positioned to determine the minimally necessary amount of information (and hence cost of assessment) required to yield reliable ratings. Especially if discovery practice changed as suggested in the accompanying article (reference to Adam’s article), the cost to make an initial assessment might be manageable.
If one can envision third party evaluations, then it does not take that much of an additional leap to consider a financial market to value and hedge law suits. Financial analysts often argue that any risk can be hedged, so why not consider a market in litigation futures or other derivative instrument? (This may be a surprising suggestion, but presumably not as shocking as the Pentagon’s ideas – since dropped – about a futures market in terrorist attacks.) This may require changes in rules concerning champerty.
This type of hedging is different from the insurance that many corporations currently carry. First, insurance covers a portfolio of foreseeable risks in advance whereas hedging allows managing a risk of a specific event – a lawsuit here – that has already occurred. And second, hedging is based on public, transparent markets whereas insurance is based on private and confidential transactions. One would hope that such a market would lead to lower-cost litigation and less of it, since costs and unpredictability would be reduced through hedging. Some might worry that speculation would arise. That, according to at least some economists, would be good because speculators add to market efficiency by inducing more participants and greater liquidity. If rules against champerty were lifted, some parties to litigation might even sell their position.
The discussion of third party assessment and the possibility of a hedge market for litigation are not meant solely as a prediction or prescription. Rather, both approaches suggest ways to bring market discipline to litigation. Markets may be imperfect, but over time, they tend to drive toward lower cost and greater efficiency.
Society may not continue to tolerate the high cost of litigation. Look at what has happened to the medical professional. Health care delivery and economics have changed dramatically, in ways that few could have predicted and that many likely would have scoffed at a few decades ago. Lawyers need to ask whether they will someday face the same pressures. Early case assessment is one way to gain control, but does not fundamentally address the problem. We may need the more radical solution of market discipline in one form or another to tame the beast.