Photo: Tom Callins

Steve Susman thinks his law firm, Houston-based Susman Godfrey, qualifies as one of the first commercial litigation funders in the U.S.

When he launched the firm in 1980, he didn't view it as a finance operation. But the model was similar: put the firm's own capital towards claims on which other law firms weren't willing to take risks.

That's likely part of why he wound up in New York on Wednesday, giving the keynote speech at the litigation finance industry's second annual LF Dealmakers Forum. Susman offered some suggestions for how litigation funders can improve their strategies. But first, he took issue with one of the fundamental premises of the burgeoning industry, questioning if the wider benefit of third-party finance is indeed, as backers say, to let injured parties have the law firm of their choice, even if they don't have the resources to pay them. 

"I say it was to provide large, hourly and typically defense-side law firms the ability to compete with Susman Godfrey," he said."Here's the rub: third-party funding is something every trial lawyer, including me, your biggest competitor, should welcome if the results are the filing of better cases and the more efficient handling of those cases that are filed."

Susman's firm still takes on a considerable number of cases that it finances itself. But the underwriting process is robust. Every attorney gets a vote at a weekly Wednesday meeting, and the firm won't advance expenses unless two-thirds of them endorse a matter. 

That degree of care is one of the reasons he's enthusiastic about third-party finance: It's more smart minds weighing the merits of any given claim. 

"It can't hurt to have a similar exercise in parallel. But you should not rely on the law firm. You add nothing of value if you do that," he said, adding that funders who actually ask and receive firms' evaluation materials open the door to "enormous" privilege waiver issues. 

Susman also advised that third-party funders adopt the same "eat what you kill" philosophy that's been a part of his firm's model from the start.

"You have better results and get more honest answers if the evaluators you have bear the risk too," he said. 

Financing arrangements that are linked to attorneys' hourly rates are also trouble, Susman argued, pointing to an arrangement he'd recently learned of where a law firm was earning half its hourly rate to take on an outside-funded case.

"Lawyers who are paid by the half hour, or quarter hour, or any metric that's based on hours spent, have no incentive to be efficient," he said. 

Some lawyers, he added, are simply not prepared to take a lean approach to litigating cases, handling a deposition on his own, cutting short discovery and eschewing a final revision of a brief. 

"You should not expect a lawyer to change the way he does things, even if in a one-off case it's in the lawyer's interest to be efficient," he said.

Instead, it's necessary to find lawyers who are capable of handling work either on a pure contingency basis, or on a fixed-fee basis, ideally where the firm is fielding 50% of the initial budget, he said. 

But, in a continuing theme of his remarks, it's a certain time of firm that he thinks is best at pricing and budgeting. Hint: it's not the big ones. 

Susman also acknowledged the biggest story of the last few months in the litigation finance industry: short-seller Muddy Waters attack on Burford Capital. He said that funders should welcome regulation of how they keep their books, lest the matter becomes the "hot coffee case" of the litigation finance industry. 

"Embrace transparency and make agreements that are understandable and fair," he said. 

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