© 2018 The Texas Lawbook.
By Gretchen Lyn Koehler of Bentham IMF
(April 23) – Litigation finance is rapidly coming of age as law firms realize how making more financing options available to their clients strengthens relationships and forges pathways for developing more robust litigation practices.
What began as a means of affording access to justice for parties seeking legal redress for the wrongs they were experiencing in business is now being embraced by firms as a strategic client development tool. This evolution creates new opportunities for law firms to spearhead initiatives focused on something that clients value more than most other aspects of their legal representation: the dollars-and-cents cost of service.
If a firm’s marketing emphasizes client value, it will benefit from preparing for client inquiries about litigation finance options. This article summarizes the fundamentals of litigation finance and how to incorporate it into a firm’s marketing.
Understanding litigation finance
In its simplest form, commercial litigation finance is funding collateralized by a commercial lawsuit. It is provided by companies seeking to realize returns from investing in cases involving breach of contract, price fixing, intellectual property infringement, breach of fiduciary duty and a host of other commercial claims.
The investments are high risk because they are made on a non-recourse basis. This means funded cases must result in successful outcomes to yield returns for investors. As such, the returns that investors receive also tend to be high. Like contingency lawyers’ fees, they often take the form of a percentage of the amount recovered by the plaintiffs that bring the funded cases, though they may also be negotiated as a multiple of the amounts invested or as a combination of the two.
Which clients are likely to use litigation finance?
As any lawyer or legal marketer who has prepared a pitch or response to a request for proposal knows, clients have been seeking arrangements that reduce the cost of retaining law firms for many years. The evolution of big data and industry tools reporting law firm rates disclosed in the course of legal proceedings have greatly increased the transparency surrounding the cost of legal services. Meanwhile, the Association of Corporate Counsel’s Value Challenge and collaboration among members of organizations like the Corporate Legal Operations Consortium have created a permanent shift in how law firms think about and deliver affordable legal services.
The demand for alternative (affordable) fee arrangements has come for many years from every type of company. Established corporations with sizable legal budgets have been just as – if not more – present in the conversation around value as have startups and midsized organizations. The same diversification is taking hold within the world of litigation finance.
What developed as a tool to facilitate financial parity in suits brought against deep-pocketed defendants is quickly evolving into a strategic finance tool used by individuals, startups and corporations alike. This shift – the widespread embrace of litigation funding as a strategic finance tool – is a trend that savvy law firms are getting ahead of now while the opportunity to proactively engage clients in dialogue about it still presents.
The universally appealing aspects of litigation finance
For some clients, bringing a commercial suit is a bet-the-company endeavor that will make or break their potential to remain solvent. From the company perspective, these suits create heightened risk exposure and drain resources that could otherwise be spent on doing what the company does best. Whether they make widgets or software programs, unless they are a litigation finance firm, most companies are not in the business of assessing, valuing and investing in litigation. While law firms often see these cases as the holy grail, companies view bet-the-company litigation as highly complex, extremely costly and very undesirable business challenges.
More mundane issues can also give rise to a need for costly legal redress. Disputes with vendors or suppliers who breach contracts, intellectual property infringements that divert revenue streams or price fixing that results in inflationary costs threatening profitability are all examples of day-to-day business challenges that prompt companies to sue.
Whether it is bet-the-company or just business-as-usual litigation, plaintiff-side litigation can be an unwanted and risky expense for a company. Rarely is it perceived as an opportunity to drive revenues and offset operational costs. However, the advent of litigation finance is changing the value proposition of plaintiff-side litigation.
When a company pays for legal services, the expense is reflected on its corporate balance sheet. If it instead uses funding to cover the cost of the legal services, the case changes from an expense to a financed asset. What’s more, if the funder determines that the damages in the case warrant $2 million in funding, but the legal fees only amount to $1 million, a company can take advantage of the full $2 million funding offer and apply the extra $1 million towards customary business costs, expansion or any other expenses. While they will pay for the financing by returning part of their recovery to the funder if they win the case, they are not on the hook for any of it if the case results in a loss.
Other reasons clients use funding
When a company uses funding, the most common arrangement is applying it towards law firm fees. This opens the field of law firms that the company can afford to hire from those willing to take the case on a full contingency to ones less inclined towards risk. While plenty of highly credentialed firms work on full contingency, funding enhances the client’s buying power when it comes to purchasing high quality legal services.
This especially makes a difference when the case does not have the bet-the-company appeal that may otherwise incentivize a firm to take it on full risk. The effective result for law firms is the opportunity to represent clients who could conceivably double their legal spend, without feeling the liquidity pinch of having to double their legal budget.
Discussing funding with clients
In application, litigation finance is yet another alternative fee arrangement that clients will inquire about when assessing which firms to hire for an important legal matter. Many are still learning how funding works and the ways that they can use it to partner with the firms best suited for handling their cases. Proactively engaging clients in discussions about how litigation finance can create more opportunities for your firm to help them advance their business can set you apart from firms taking a passive approach to this development.
If your firm has historically only been hired to handle a client’s defense-side litigation, approaching them about how you can use funding to share the risks – and potential rewards – of handling their plaintiff-side work could broaden the relationship. With funding available to cover the cost of “trying you on for size” in this capacity, they may be more amenable to such exploration.
Customizing pitches and RFP responses to demonstrate how funding can impact the budget for a case presents a subtler opportunity for firms to initiate conversations about litigation finance. Comparative modeling that shows what the client will pay out-of-pocket to pursue the case with discounted fees, for example, versus pursuing it with funding can be a compelling way to demonstrate that the firm is striving to put forth a proposal that considers how best to achieve the client’s comprehensive goals – including the goal of righting a wrong while adhering to their annual legal budget.
Law firms have adapted their businesses in many ways to heed the collective in-house call for greater client value. Alternative fee arrangements, client feedback programs and specialized task forces are only a few examples of the many innovations that have raised the bar across the industry as ideas about client service have evolved. Litigation finance, which can be used by clients and law firms as a strategic finance tool, creates new opportunities for savvy firms to deliver the service that clients want.
A version of this article was first published in the Legal Marketing Association’s Strategies magazine.
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