Understanding Litigation Risk: "One-Off" and Portfolio Litigation

For purposes of evaluating litigation risk, litigation can be split into two types: “one-off” and portfolio litigation.  The challenges of evaluating litigation risk are different for each of these.

”One-off” Litigation

One-off litigation usually refers to a lawsuit or set of lawsuits that are unique in the firm’s experience.  While it is rare that a suit will threaten the existence of the firm, especially if it is well capitalized and or has adequate liability insurance, such suits may threaten the viability of a particular product or service.  Examples of such litigation are the 2016 class action against the Wells Fargo bank alleging the creation of fraudulent banking accounts, or the 1996 action against the juice maker Odwalla for selling juice contaminated by a deadly bacteria.  As these examples illustrate, one-off litigation can involve significant reputational costs that must be considered. The risk of these suits is not only in the outcome of the judgment, but depending on the information released during the litigation process, in the reaction of shareholders and consumers to new information or even allegations.  For these reasons, “one-off” litigation may exact greater human costs than other types of suits, and the resulting stress can lead to poor decision making. An objective evaluation of the true risks of the litigation is especially important in such cases to counteract this problem.

Portfolio Litigation

Portfolio litigation is the type of routine litigation which firms experience on a regular basis.  Examples of such litigation include car accident suits routinely litigated (and settled) by insurance companies, debt collection suits, employment suits, securities, and contract actions.  This is the bulk of litigation in the United States in both state and federal courts. Portfolio litigation may still pose the risk of significant loss for the firm, but because it is routine and firms tend to have significant experience with the particular type of suit, it is easier to measure the risk of judgment exposure and litigation costs than in one-off litigation.  Often firms believe that subject matter expertise and past experience are sufficient to determine litigation risk in such litigation, especially in cases where reputation risk and regulatory risk are perceived as small. A question remains whether subject matter experts’ perceptions of litigation risk in such cases is accurate in the run of cases, and whether more robust use of data, in conjunction with human evaluation, can lead to better evaluation of risk.  In a changing legal environment, prediction of outcomes in portfolio cases may be behind the times, based on previous experience rather than the current legal environment.  For example, if the statute of limitations is changed for a category of cases, predictions as to the rate of filing need to be adjusted.  

When Portfolio Litigation Becomes “One-off”

There are instances where suits that begin as a portfolio litigation or might have been portfolio litigation can grow into a one-off litigation.  For example, the tort suits against the drug manufacturer Merck in connection with the drug Vioxx would have been portfolio litigation if they had been brought serially over time, but because of the number of suits (approximately 70,000 in state and federal courts) and consolidation of those suits, that arguably became a one-off litigation for the company.