Beyond Hourly Podcast

Read the transcript below:

The following episode of Beyond Hourly was recorded before the merger of IMF Bentham and Omni Bridgeway.

Sarah Tsou:
Hello and thank you for tuning into the Beyond Hourly Podcast, hosted by Bentham IMF (now known as Omni Bridgeway). As one of the worlds most experienced commercial litigation funders, Bentham IMF has invested nearly two decades into providing litigation finance and investment capital to plaintiffs and law firms. We offer law firms and their clients a risk-sharing partnership and a proven record of success as a leading global litigation funder.

Episodes of this podcast can be found on our website, www.benthamimf.com (now at www.omnibridgeway.com), and on iTunes, Stitcher and SoundCloud. I’m your host, Sarah Tsou. I’m an investment manager and legal counsel at Bentham’s New York office. Prior to joining Bentham, I spent over 12 years as an intellectual property Lawyer at Kirkland & Ellis LLP. My role at Bentham involves assessing investment opportunities in the IP space and beyond and serving as a strategic resource for the parties we fund throughout the funding relationship.

We’re back today with the second half of our interview with Steve Cherny, a partner at Quinn Emanuel. Steve has over 25 years of high-profile patent litigation under his belt and he’s won some of the most important patent cases in the last decade. In addition to his private practice, Steve also serves as a lecturer at the University of Chicago Law School and is a former member of the District of Delaware IP advisory subcommittee. I’m also proud to say that I had the privilege of working closely with Steve for a number of years while we were both at Kirkland & Ellis.  

If you missed the first portion of this interview, I encourage you to listen in for Steve’s insights on the current landscape of litigation and damages and also how he came to hold the record for collecting the most money from a single patent infringement judgement ever, more than $2 Billion.

Today’s episode delves into when and why Steve’s firm, Quinn Emanuel, shares risk with clients, how litigation funding has impacted his practice, and the ways it is benefitting the legal system on the whole. With that, lets jump back into the interview.

Quinn is known for its willingness to share risk with its clients by entering into alternative fee arrangements. What do you think sets Quinn apart in this regard?

Steve Cherny:
I think we're probably a little more creative than most, and that doesn't mean that our competitors aren't creative or sophisticated law firms. It's probably a bit of the business model. Quinn is, I think, the largest firm dedicated purely to litigation or dispute resolution. As a result, we, our business, is being a little more creative in that area. Also, that's how we generate our income. Other firms—like a lot of traditional white shoe firms—litigation is a bit of more support, and it doesn't mean they're not great litigators, or it's more balanced, but for us, you know, because all of our business comes from litigation, it behooves us to be a little more creative in terms of working with our clients to figure out ways to generate value for them, and us, out of litigation.

Sarah Tsou:
Alternative fee arrangements generally mean that, you as the attorney, are sharing risks with your clients. Do you think that's important?

Steve Cherny:
I think it's important to have as an option. I mean, each client is different. Some clients are conservative, and they like to have (the option to say) “I'll pay you your rate.” We have plenty of clients who pay rates, and they're more conservative about it. Other clients, for reasons, for example, having to do with their cost balance sheet, you know—just in terms of the internal views and things—it’s not a matter of conservatism, it's just a matter of being able to allocate cost to certain times. It can be very helpful, for us, to share the risk going forward; either alone, or with a funder like Bentham.

For others, they would never even get into the courthouse otherwise, and they do have valuable claims. For them of course, it's probably the most important for us to be able to do alternative fee arrangements, and to be creative in doing it because otherwise, if somebody out there who has a claim that's valuable … I think we saw over the last ten, fifteen years, in terms of all the litigation relating to the financial crisis, we were very creative. I mean it was a little bit before I got to Quinn. It's a bit hearsay, but I think there's a lot of creativity there that enabled a lot of people to get their claims adjudicated in a fair way, by having sophisticated counsel represent them. People were willing to work with them and be flexible in terms of the way they allocated risk.

Sarah Tsou: 
Do you think litigation funding has enabled your clients to retain you as their attorney, where they otherwise wouldn't be able to?

Steve Cherny:
Yes, I think that's clear, whether it's me or any of our other people at some very good firms. I mean in the past people's choices were either pay straight rates or go to a contingency lawyer. I think that there was a perception that sometimes contingency lawyers were maybe a little bit less at the top of their game. Some of them were very good. Also, their incentives were very different. If you're just during pure contingency work, there's a matter of cash flow coming into the firm.

Sarah Tsou:
Sure.

Steve Cherny: 
You knew you had to wait a couple years, at least until you get somebody … until you get a settlement. What happened was, it would drive the lawyers there to try to do as little as possible to get some amount of money in fast, and in those cases the plaintiff probably wasn't getting the best representation. Now, the incentives are changing a little bit, and I work with, or other people work with, a litigation funder. It enables us to go for the long haul. Meaning that we're not worried about trying to get $20,000 now for putting three hours worth of work in—we're not incentivized. We're incentivized because our costs are being met, often, and we're incentivized to work really hard for a good return at the end. Which we will share with the funder, but by hedging it a little bit so that we're not bearing all the risk, and essentially the near term cost of having no money coming in.

I think what's it's done is led to better lawyers being willing to represent clients who in the past would have had to choose either contingency fee lawyers or nobody.

Sarah Tsou:
That makes sense, and it's great to hear. Patents used to seem like such a natural fit for creative alternative fee arrangements, like what you can provide, and litigation funding. How do you think litigation funding is impacting the patent litigation landscape?

Steve Cherny:
I think for the same reasons as other landscape's I imagine. As I said at the very beginning, I'm pretty much a patent trial lawyer, so I can't speak to others. I have to say, I think it's opened up the courthouse to various claimants who before, would have gone to a contingency law firm. I think the quality of lawyering has gotten better for a lot of plaintiffs as a result of being able to use litigation funding to fund. I think also, it's brought a certain level of quality and discipline because in the past, I mean, lawyers are lawyers. We're not businesspeople. I think some of us try to do our best, and the litigation funders have, I think, maybe an unintended or unexpected benefit is, is that they do some very sophisticated underwriting of the cases.

In some respects, the whole system I think is benefiting, certainly in the patent world, of having people take a hard look. It tends to become a feedback loop where before you might have a lawyer take a flyer, and a case that probably shouldn't be in there. Now when they're working with someone like Bentham, you know, or other funders, you have to get to a process where you have to kind of justify it, and so it's much higher than your traditional Rule 11 basis. Now you're trying to really make a case, maybe even more than most companies do internally because, you know there's an underwriting process and I think it's probably forced people to do, in a lot of cases, a lot more substantive analysis early and make sure their case is better from the get go. I think it's helped in that respect and I think for some companies it's helped them bring claims that might not be barred by the ability to pay, but just by the flow at the time—where people just don't want on their books X amount of litigation costs that they can spread out over a number of years.

Even though it's a big company that can afford to pay, just the difference in where those costs show up can make a big difference to people in terms of share value and other things that they focus on. I think that's probably true of every type of litigation though. I don't know what's unique to patent litigation, but it certainly is true.

Sarah Tsou:
That's a benefit that litigation funding can provide to companies like the ones you have represented.

Steve Cherny:
I think so.

Sarah Tsou:
What do you think law firms should be doing with respect to litigation planning?

Steve Cherny:
I think they should be learning about it. I was surprised how little I knew. If you asked me two, three years ago, I think about litigation finance, I had one or two experiences with it, but didn't know that much. I know a lot more now. I would just tell people to look at it with an open mind and come talk to folks like you, Sarah, and learn about it. It's a great service. I think people need to, kind of put aside any preconceptions about litigation funding. They may have it somehow, it's some unsavory way of going forward. It's like any other type of thing. It's a business and like I said, I think it has benefited lawsuits in general by putting some additional discipline on the lawyers and the plaintiffs who work with litigation funders to make sure their cases are meritorious and make sense from an economical perspective. I'm not sure if everyone out there really understands that. I think a lot of people have ideas about what litigation funding is, but I don't think they really understand it.

Sarah Tsou:
Do you think as more and more law firms are learning about litigation funding that they're understanding the model and even of those misconceptions you discussed?

Steve Cherny:
Yes, certainly. You see a lot more discussions of it. I saw, recently, an article where different law schools are starting to teach it. I'm certainly going to raise some of the issues at the University of Chicago, which would seem to be the most natural of all places—where I teach.

Law isn't an island. Law intersects with business and economics. I know that sounds very University of Chicago, but in this regard it does. I think the more economic rationality that's brought to the process, the better it is for everybody. I think more people understand it now and I think the more they do … it's not like you're forced into it. I don't think people understand, for example, how many litigation funders are non-recourse. Meaning this is not a loan to pay the fees, it is a risk share. Just like in contingency fee law, the law firm is taking on all of the risk. Now you just have someone who's going to hedge that a little bit and make it easier for everybody to take risk when it makes economic sense to take risk. People like Bentham are not putting their money where it doesn't make sense. It doesn't mean that you guys are, like any other investment, always are right. Involving a litigation funder, I think it opens opportunities, but it also it helps everybody do a better job of making good choices.

Sarah Tsou: 
Well, it's clear that you're very sophisticated when it comes to understanding these types of financing. What do you suggest that clients look for in a funder?

Steve Cherny: 
It's funny, one indication that funding is on the rise, kind of like any other newer business, is that I get approached by lots and lots of funders. I get emails and you meet with people, because why not? It's like anything else, it's business, and competition benefits us and our clients. Some funders are sophisticated, again, that word is probably overused, but it's like anything else. Some are a little fly by night-ish perhaps, some are in the middle. I think you're always better going off with the people who are smart. I think you'll get better feedback. I think they'll do a better job of helping you understand the true value of your case. If you're a plaintiff—as much as you emotionally want to go forward and you think it's going to be a big win—it’s good to work with an honest funder, who is really analyzing the issues and is willing to give you the feedback and say, "Look, we just don't see the value here." As opposed to just going headlong spending two or three years of time, the law firm's money, etc. Just going after something, that probably, they'd gone through the process that a funder might have put them through, then maybe they wouldn't do it. 

Like anything else, I think you're better off going for people who are higher caliber where the people who work there, the experience that adds to the process. Of course, if you're dead set on doing something, and those people won’t give you money, talk to people who are a little bit more willing to take risks. It's like anything else, like banks. There are some banks that are conservative and sensible and there are some that are probably a little more risk taking. Depending on the need for your clients and your willingness to take on risk, that's how you should determine which funder you should go to.

I personally would prefer to go to the ones who are a little bit more sensible and a little less gambling.

Sarah Tsou: 
That's great to hear. Just to wrap up, what's an actionable take away that you would like to recommend to our listening audience?

Steve Cherny: 
Depending on if the people that are listening to this are people that are interested in litigation funding, I guess the actual take away is that even if you think maybe it's a case you pay for by yourself, or say you're a defendant, I think a lot of people don't realize that defendants can also get litigation funding, because they're thinking it's only just about percentages or awards. Given the audience and given who I'm talking to, probably an actual take away is if you're going to get into litigation, it's going to be a long process, it could be expensive. It doesn't cost anything to go talk to people like you. So, why not? You might learn something. You might learn something if you're a defendant, about maybe a way you could share the risk in terms of legal fees and only have to pay more if you win. Of course, if you're a plaintiff, you may learn a lot more. You may be under the misconception that you're essentially going to have to pay back a loan or not understand all of the different structures that are possible.

Given that this is a litigation funder’s podcast, I guess the actionable take away, other than give me a call about a patent litigation, would be to come talk to you guys.

Sarah Tsou: 
I'd like to talk more about how you think litigation funding could help clients who have some defensive cases. What are your thoughts on that?

Steve Cherny: 
I think it's not intuitive. I think people only think about litigation funding as if it's just a matter of, in some respects, investing gambling on big judgements. For every plaintiff there's a defendant. Those people also have a lot of the same issues in terms of costs on their balance sheet, hedging risk. Especially, there are companies that get sued all the time and where litigation costs mount up and where if you win, you would be more than happy to pay essentially a success bonus and if you lose, you're probably happy to pay less than the full amount. I don't think people realize that you can do something like structure a defendant's case where you have X amount of fees. If you sit there and work out what a success would be or what different types of success there would be. If, for example, you the litigation funder make it possible to get better counsel for them, part of that is they don't pay the full price for having better counsel.

For example, I could go forward and maybe I can only afford counselor X to defend me and that may mean that I'm more likely to lose a big judgment against me. I don't want that, but I also can't bear the risk or the actual payments of paying two or three years of expensive litigation bills. I can face it that way and pick what I think is lesser counsel, and I don't mean to be judgmental, but with a lesser track record, or experience, those are my choices. Or I can go to someone like you guys and we can work out a deal where essentially, that in order to avoid the risk of, for example, losing two hundred million dollars, if I can improve my chances of not losing my two million dollars by ten percent, that's  worth a lot of money to me. Twenty million dollars worth of expected value. If I can get that extra ten percent by hiring better counsel, maybe I'll be willing to pay some additional fee to you guys, if I win. If I lose, I haven't had to pay the entirety of the counsel fees to lose.

I'm not sure if it's coming through clearly, but again to me the benefit is that it's just another situation where I can benefit and probably get better representation and also hedge some of the risk and maybe smooth out some of the fees if I get a funder involved.

Sarah Tsou: 
That makes sense and I know that you've represented many clients who have both plaintiff-side and defense-side cases. I think it's interesting though, a lot of those companies I found have not realized the benefits of litigation funding for their defensive cases. What you just discussed folds in well with something we offer called hybrid funding, where our funding can be used for any cases whether on the plaintiff-side or the defense-side in the portfolio, and our recovery is from the plaintiff side. Where there are valuable previous claims, we're happy to fund that portfolio of cases and can be very beneficial for the defense-side cases for the company.

Steve Cherny: 
What you said actually reminded me of something else. I think a lot of lawyers, companies don't realize that they can have a relationship with the funder that is not a single one shot case. That's people who are regular visitors to the courthouse whether it's lawyers like us, or companies can make arrangements with folks like Bentham, almost like an insurance policy is some respects, not insurance, but essentially help them deal with the episodic nature of litigation and the fact that you can get a big hit all of a sudden in terms of fees and costs and all that. If you're a frequent visitor to the courthouse either as a defendant or plaintiff, you can work out, from my understanding, pretty reasonable or interesting structures that allow you to smooth out those episodic bumps. It's not just a matter of, “I have a litigation, now I'll go for my one time visit, to visit you, Sarah.”

Sarah Tsou: 
Right.

Steve Cherny: 
It's that you can make arrangements that cover a portfolio of cases expanding different types of legal areas or technologies or whatever, in such that a company might benefit at that point by saying, "I know statistically, I'm going to be sued X amount of times over the next five years." They can work something out with a funder that makes things a lot more predictable. In my experience companies, as well as law firms really like predictability.

Sarah Tsou:
Right.

Steve Cherny:
They can essentially turn the episodic unpredictable nature of litigation into something that becomes a predictable smoothed-out cost. Of course, you guys get something out of it as well. They get that level of predictability.

Sarah Tsou:
Stability is important to everyone.

Steve Cherny:
I think so.

Sarah Tsou:
Well, Steve I want to thank you again for appearing on our "Beyond Hourly Podcast" and sharing your perspective. As I mentioned at the outset, episodes of the "Beyond Hourly Podcast" can be found on our website: www.benthamimf.com (now www.omnibridgeway.com) and on iTunes, Stitcher, and SoundCloud.  

We'll be back soon with another episode focused on advancements and legal services that provide economic value for law firms and the clients they serve. Until then, I would like to thank our audience for listening in and invite you to follow up with me, Sarah Tsou, at [email protected] and provide any feedback or ideas you have for topics we should cover. Thank you and be well.