Why GCs Should Approach Litigation Valuation Like a Litigation Funder

As a litigation funder—a financer who invests in commercial lawsuits—I spend all day analyzing complex litigation. My team and I objectively evaluate the merits and the various known and unknown risks associated with cases. In essence, litigation funders succeed through their repeated success in underwriting lawsuits. In-house counsel should consider taking that same approach to litigation valuation. 

In-house attorneys need to determine whether the risk-adjusted value or exposure justifies the distraction and budget for their c-suite executives. In my experience, these attorneys often take an ad hoc approach to valuation—which can lead to biased or imprecise evaluations.  

When valuing litigation, it is useful to break down the components of the litigation. These components include the legal merits, damages, duration, and collectability. 

Legal Merits

The legal merits of a lawsuit, while complex, is perhaps the most straightforward component for valuation.  Litigators are skilled at roughly estimating the likelihood of success. But how do you add quantitative rigor to this approach?  To start, litigation risk is lumpy.  There are multiple milestones in a lawsuit.  A common way to evaluate the merits is to assign a probability to each milestones.  Houlihan Lokey echoes a version of this approach in their article “A Valuation Framework for Litigation Finance Assets.” What are the odds of losing at motion to dismiss, motion for summary judgment, trial, and appeal? This framework reflects that the value of a case can change dramatically with a single ruling. When feasible, detailing these milestones and probabilities provides a more nuanced picture of the legal merits, and it can help non-litigators visualize the risks.

Damages

As for damages, trial lawyers can usually derive a damages estimate or at least a range. The issue for litigation valuation is that damages are not created equal. Some calculations, like future lost profits for a startup business, are necessarily speculative. This nuance regarding the certainty of damages is key to valuing a case. Winning on liability and winning a large judgment are not the same.  

Duration

At the outset of a lawsuit, duration can be difficult to predict. A case can move quickly until an overworked judge sits on a motion for six, twelve, or eighteen months. Similarly, one disconnect I find with respect to duration is the import of the scheduling order. Non-litigator clients often believe that the court’s scheduling order is firm and reliable. Litigators understand that scheduling extensions are commonplace. When analyzing the value of litigation, which naturally includes an estimate and adjustment for duration, it is important to determine whether the current scheduling order is likely to change. 

Collectability

The collectability of a judgment is not discussed as much as the earlier components. This is especially true with commercial lawsuits between sophisticated companies. I would add a reminder to in-house counsel to inquire whether the defendant entity is expendable. There are plenty of examples of large corporate entities letting a single affiliate dissolve for business or litigation purposes. Collectability can be more complicated than knowing that the defendant is an affiliate of a wealthy company. 

As a final point, I have talked to hundreds of litigants who are looking for advice or are interested in funding to monetize or defray the costs of litigation. I keep hearing the same story:  they have a potential affirmative lawsuit, but it does not seem to be worth the distraction or the cost. That decision is a valuation exercise—the value of the case versus the downside.  Remember, when in-house counsel can accurately value and pursue lawsuits, they become a revenue generator for the company.