Quinn Emanuel partner Steve Cherny points to predictability, better lawyering and stronger cases as outcomes of litigation finance
Litigation is not just another practice at Quinn Emanuel Urquhart & Sullivan—it’s the heart of the firm’s business. “Because all of our business comes from litigation, it behooves us to be a little more creative in working with our clients to figure out ways to generate value for them and for us out of litigation,” said Steven Cherny, a Quinn Emanuel partner and veteran patent litigator.
The firm’s innovative approach includes deploying litigation financing as a tool for its clients. Cherny, an extremely successful patent litigator, recently sat down with Sarah Tsou, a former law firm colleague turned investment manager and legal counsel at Bentham IMF, for a wide-ranging interview on our Beyond Hourly podcast. They discussed the ways Quinn Emanuel shares risk with clients, how litigation funding has affected Cherny’s practice, and how funding is benefiting the legal system as a whole.
New Incentives for lawyers
A key takeaway from the interview is just how much litigation funding has altered the landscape. Higher-quality, more experienced firms like Quinn are willing to take cases on contingency because they are sharing risks and rewards with funders. “We’re incentivized because our costs are being met,” Cherny said. “And we’re incentivized to work really hard for a good return at the end [of the case], which we will share with the funder.”
In his own practice area, patent litigation, Cherny said funding has opened the courthouse to new claimants who might not have had the resources to bring meritorious patent claims and has allowed them to seek better counsel. “I think the quality of lawyers has gotten better for a number of plaintiffs as a result of being able to use litigation funding,” he said.
Benefits For companies
Funding, Cherny said, is also proving beneficial for companies that may have the resources to pursue litigation, but who have hesitated to do so because of the negative impact litigation can have on corporate cash flow and shareholder returns. Financing allows those companies to remove legal costs from their accounting statements and record funding as revenue when it comes in—thus improving the company’s overall financial picture and immediately monetizing litigation that might otherwise have taken years to yield a return.
Cherny suggested companies and firms can reap further advantages through portfolio financing. “It’s not just a matter of ‘I have a litigation, now I’ll go make my one-time visit to a funder.’ You can make arrangements where you cover a portfolio of cases,” he said.
Putting multiple cases into a portfolio and using that portfolio as collateral for the financing makes the investment less risky and, more attractive, to funders. Another appealing benefit of portfolio funding is the option to create a hybrid-portfolio containing both plaintiff and defense-side cases. This allows a firm to use funding to offer creative alternative fee arrangements in defense-side matters added to the portfolio.
From a company’s perspective, a portfolio approach can help smooth out the episodic and unpredictable nature of litigation and its impact on the budget. “A company can work something out with a funder that makes things a lot more predictable,” Cherny said. “And in my experience, companies—as well as law firms—really like predictability.”
In addition, litigation funders like Bentham take great pains to determine the value of litigation and its chances for success. This sophisticated underwriting process, Cherny said, is helping push lawyers and claimants seeking funding to a higher level of quality and analysis and discipline when initiating their cases.
Funding, he said, “is a business, and I think it has benefitted lawsuits…by putting additional discipline on lawyers and plaintiffs who work with funders to ensure their cases are meritorious and make sense from an economic perspective.”
What Firms Should Do
Cherny recommends firms study funding with an open mind and engage in a dialogue with funders about their work. “I think a lot of people out there have ideas about what litigation funding is,” he said. “But they don’t really understand it.”
One issue that inside and outside counsel often miss is the non-recourse nature of most funding arrangements, Cherny said. A non-recourse arrangement means that a funder like Bentham invests in a case and is entitled to a return only in the event of a successful recovery. If the case loses, the funder is owed nothing. “This is not a loan,” Cherny said.
Conclusion
Bentham is committed to helping the legal community learn more about the work we do. Our Litigation Finance Education Center, is designed to provide a one-stop resource to help legal professionals develop a mastery of litigation finance issues.
The Company Insights is also where you will find episodes of the Beyond Hourly podcast, including Sarah Tsou’s two-part discussion with Steven Cherny. Beyond Hourly can also be found on your preferred podcast network. Tune in to hear more from Cherny, including his views on the qualities clients should seek in funders, the changes litigation funding is bringing to the legal industry and how funding might be used by to help pay for defense costs.
To learn more about litigation financing or how your firm can benefit from portfolio funding, contact us for a consultation.