Litigation Finance

A common tactic of university administrations is to unlawfully fire a tenured professor, knowing that he would win if he sued them in court for breach of contract, but then to settle out of court by paying him a lump sum of money. Looking at it this way, a lot of apparently senseless university behavior makes sense. Why do they fire the professor when they know they'd lose in court? ---because they've done the calculation, and they've decided it's worth paying $100,000 to get rid of him.

The question for a university president is thus how much firing the professor will cost, not whether it is legal or not. A big part of how much it costs is the university's use of three sub-tactics: 1. Professors' impracticality, 2. The conflict of interest of the professor's lawyers, and 3. Starving him out.

Professors' Impracticality

Professors are not practical people. That is why they become professors. They are mild-mannered, timid even, and lack practical business skills. As a result, the university can expect them to settle for too little. Suppose a professor earns $80,000/year plus $20,000 in fringe benefits (health insurance, pension, etc.) and is 50 years old. If the university fires him, and as a result of the firing he will not be able to get a comparable job, he has lost about $2 million. Let us suppose, too, that he has an 80% chance of winning in court. The value of his claim is .8*2 million = $1.6 million (ignoring time discounting). He will have to pay 1/3 to his lawyers, about $500,000, but the university will have to pay about the same to its lawyers, another $500,000. If professor and university are equally good at bargaining, we'd expect the university to pay the professor $1.6 million to settle the case. In reality, though, the university will offer the professor $300,000 and the typical professor will accept it. The sum of $300,000 looks really big to him, and he doesn't realize how badly the university wants to settle. Also, he is highly averse to risk, and incapable of living quietly and calmly the four years the lawsuit will take.

The conflict of interest of the professor's lawyers

The professor's lawyers are probably doing the suit for a contingency fee, one third of the winnings. The longer the suit proceeds however, the more the cost to the lawyers in time and energy rises, and the cost rises at a faster and faster rate. If the suit settles before it is even filed, the cost to the lawyers is very low, so they have a strong incentive to urge their client to accept even a low offer if it is made early. Filing does cost the lawyers a considerable amount of time and energy, because they have to file the Complaint and other papers. Their costs then decline to a fairly low level until after the Motion to Dismiss is defeated. At that stage, costs rise much much higher during the Discovery process. [to be continued]

Starving him out

Most people live hand to mouth. They do not have a large amount of savings. They own a house by middle age, but they still are making mortgage payments. Thus, when the professor is fired, he has little income and large yearly expenses. He could borrow against his home equity, but he is reluctant to do that for purely psychological reasons. He does not think of such a loan as a business venture, as investing $200,000 to gain an 80% chance of earning 2/3 (after he pays the lawyers) of $2 million. If he does think of that, he is very risk averse, and doesn't want to risk losing the $200,000, even though when he was younger he was quite happy despite not having any equity in a house. So the professor simply can't afford to wait four years for the lawsuit to end, and couldn't wait even if he had a 100% chance of winning instead of 80%. The university knows this, so it offers him $300,000, and he accepts it.