Law firms shifting how they analyze risk
Law firms are changing the way they think about risk. It’s fair to say that ten years agomany large law firms (with only a handful of exceptions) were opposed to the idea of contingency work.
Their view was often that a firm would choose to do hourly or full contingency work and there was not a lot of middle ground that existed between those two. Then litigation finance came in and changed the model, making partial contingency or hybrid models more common and feasible. Now, law firms that were previously wary of full contingency cases can take partial contingency where they keep some upside of the case but have enough money coming in the door to keep their lights on.
That growth is one trend we expect to continue in 2023. We’re seeing a lot of the traditionally conservative law firms that would never have considered contingency work starting to dip their toes into taking some risk on litigation, in a way that people would have been surprised to see even a handful of years ago. It may be because these firms are seeing their competitors do it well and make a profit. It may be due to the natural changing of the guard at these law firms, as younger partners are coming in more willing and able to take risks. Regardless, there’s now a new generation of partners who are not as conservative as the ones preceding them.
Going forward, we expect to continue to see more firms become creative and comfortable with this change. At the end of the day, there are not a lot of limitations on what a law firm can do to structure the kind of economic relationship that they’re asking for from a client in a large plaintiff-side case. So, as the firms get more creative—and their clients get more accustomed to the new structures—we anticipate this creative financing becoming more common as the law firms find ways to better match the benefits and risks.
Continued conversations on transparency and regulation
Questions about transparency and disclosure is an evergreen topic in litigation funding. But before jumping into this trend, it’s important to step back and recognize that we’re having a larger conversation about disclosure, and no longer about whether the litigation funding industry itself should exist. Questions about whether litigation funding should exist at all in the United States have largely disappeared.
Most lawyers now recognize that the litigation funding industry has become so ingrained in the functioning of the legal ecosphere that there is no way it can be removed wholly from the system. Instead, the conversation has evolved into questions about the contours of how it fits into the current system through transparency, disclosure, and rules. And we shouldn’t miss that point when we’re talking about this because it is a real change in the conversation.
Looking at the issue of disclosure and transparency, more recently we’ve seen Judge Connolly in the District Court of Delaware putting out standing orders on both third-party finance and ownership of patents, as he’s working to better understand the docket that’s in front of him. You’re also seeing a lot of development in other states and courts, where there just seems to be no interest at all in disclosure or transparency. Some courts have questioned the entire nature of why we should care about the financing of litigation when, for example, we don’t ask about a Fortune 500 company’s bank loans that are being used to finance their cases. There area lot of things that Judges and the courts do not know about the specific parties that are in front of them. And why is it that litigation funding should be treated or handled differently?
This is a conversation that we expect will continue in 2023 and probably 2024 and 2025, as everyone tries to figure out the appropriate balance of rights, roles, and control.
Increased attempts at (and invocation of) AI, automation and analytics
Artificial Intelligence has quickly become a hot talking point. With the recent launch and success of ChatGPT, the technology is beginning to infiltrate more industries. It would be interesting if AI were sophisticated enough and the legal system was structured enough where it could be used, but, realistically, it’s not something that we’re seeing out there in the industry yet. We don’t expect that to change in the near future, although many people and firms are likely to investigate and attempt an increased use of “AI”—both the technology itself and the buzzword.
The legal system is a particularly difficult nut to crack for artificial intelligence and machine learning — in no small part because the legal system is not a set of structured data like a database. AI needs a set of data that can be used to train it, and a set of data to analyze. Unfortunately neither of these databases exist in a sufficient form to train or the provide sufficient input to AI. Every single county and courthouse handles its cases differently. There are a lot of courts that still use handwritten orders, and there are many courts where routine trial court orders are not available electronically. I remember writing summary judgment orders by hand in the Cook County courthouse on carbon paper in 2015. Many important or even determinative pieces of evidence and testimony are not filed in dockets, and much of it is not available or discussed in the docket because of protective orders instituted by courts at the start of a case.
We also know that most cases settle, and the outcomes of those cases are rarely made public in a way that can be analyzed by AI. So, no matter how sophisticated artificial intelligence technology starts to become, you have more of a data problem than anything else. Not to mention, there are plenty of qualitative aspects of litigation, like evaluating if the fact witness key to a case is credible or likable, that don’t appear in the written papers.
This problem is compounded when we think about asking AI to analyze legal risk. The uncertainties and the imperfections of the legal system, and the fact that so little of it is written down, means a minimal amount of litigation information is digestible in a mechanical way. AI is a very imperfect solution to the legal system and to risk analysis in this context.
However, there are specific areas where we think AI can be helpful or aid in analysis. It can look at and analyze the histories of a specific court or a specific judge or the duration of cases. It can be a value add. But if you think of AI as anything more than one of many tools in a tool belt, you are underestimating the natural limitations and imperfections inherent to litigation.
Moving away from class actions
Finally, one interesting thing we’re seeing in commercial litigation is a continued movement away from class actions. To be clear, class actions continue to be a significant category of litigation, but companies have been structuring arbitration clauses and contractual provisions to prevent large scale class actions from being filed against them. This has been compounded on to the narrowing of class actions by the federal courts. And the trend has been how plaintiff attorneys have reacted and adjusted to these developments.
One of the things that you’ve seen plaintiff attorneys do is move away from class actions into mass torts, or sometimes mass arbitrations, as a reaction to the fact that class actions are less feasible than they were 10 or 15 years ago. Law firms have developed internal administrative capabilities to handle these large cases. The effect has been large marketing campaigns, and large case filings, that seem to sometimes overwhelm even sophisticated defendants.
In a way, it’s almost as if the defendants are like the dog that caught the car. They’ve been so successful at limiting class actions that they have pushed creative plaintiff attorneys into developing other sophisticated techniques machine for developing and managing mass actions. So, defendants are in a position where they have to decide whether a large class action may be preferable to these complex, difficult, ambiguous mass torts. In that same vein, defendants seem to be trying to get them under control at times with strategic bankruptcy filings, but it really does seem to be an area where the combination of defense attorneys and the defense bar trying to kind of push plaintiffs into a less favorable regime has wound up shifting the entire landscape. It will be an interesting trend to watch in the year ahead.