Litigation Finance as a Business Development Tool

Complex commercial litigation is expensive, often prohibitively so. In recent years, litigation finance (LF) has emerged in sophisticated markets as an option for cases with a strong likelihood of success. For law firms, this form of funding can be a striking competitive advantage that directly facilitates high-value matter arrangements, strengthens existing client relationships, reduces firm risk and generates increased profits.

Commercial LF entails a third-party funder providing nonrecourse capital to fund legal fees and expenses and/or to raise funds for corporate purposes (operating costs, etc.) in exchange for a financial interest in the legal matter. If a claim is successful, the funder receives an agreed-upon portion of the claim proceeds. If a claim is unsuccessful, the funder is owed nothing.

The market for LF is expanding rapidly with a market size now estimated at $3 billion. Litigation finance is no longer the virtually unknown concept it once was. That said, many in the legal industry have a general awareness of the trend but a low level of substantive knowledge and experience in how to approach it and in how to sell the service to clients.

While LF has its detractors (the U.S. Chamber of Congress has been particularly strident in its opposition), a favorable body of law has developed around the subject since the late 1990s. In December 2013, in a ruling by the New York Supreme Court, Justice Eileen Bransten wrote in the opinion in Lawsuit Funding LLC, et al. v. Lessoff, et al., 2013 NY Slip Op 33066(u): “Litigation funding allows lawsuits to be decided on their merits, and not on which party has deeper pockets or stronger appetite for protracted litigation.”
In 2011 the American Bar Association on Ethics 20/20 Information report to the House of Delegates supported LF as being in compliance with ABA Model Rules. That report was based on two years of exhaustive study. And in the UK, it is now a requirement for counsel to make clients aware of alternative financing options for civil actions.

Not only is LF here to stay, it has become a significant factor in the commercial litigation field. How can legal marketing professionals and practice group managers educate themselves and effectively differentiate their law firms by offering it as an alternative? The key message: LF is a viable alternative in helping your clients manage the costs and risks of pursuing legal claims.

The best candidates for funding are cases with a number of qualities in common. Primarily, they are strong, meritorious cases with demonstrable economic value—typically over $500,000. They represent a significant burden to the client in terms of fees and expenses, but their potential upside far exceeds the costs. A broad range of firms, from litigation boutiques to larger, established practices, can take advantage of the benefits of LF. Young partners can leverage LF to grow their client base, and larger firms can use it to balance risk across their caseloads.

To effectively leverage LF as an alternative fee arrangement offering, law firms must become educated on how LF works and the value a funder provides beyond financing. A very common concern for lawyers and their clients is that the funder will be directing the course of the litigation; however, funders have no role in developing strategy for how a matter is pursued.

In the first significant step to obtaining financing, a nondisclosure agreement is executed. Next, the merits of the case are vetted by the respective funder’s process, which typically utilizes non-privileged documents to permit an analysis of issues, case posture and evidence; then, clients and relevant experts are interviewed. At this point, the general funding terms are discussed so all parties have a sense of what the structure of the deal will be, avoiding surprises later in the process.

LF’s largest value proposition, aside from financing, is providing counsel and their clients a sophisticated, impartial and critical review of the claims at issue. For example, at Vinson Litigation Finance, once a case has been accepted, we draw upon our partnership with leading jury consulting firm Vinson & Company to provide clients with an early case assessment report. This is a detailed and objective analysis of juror perceptions regarding case strengths and vulnerabilities that can assist counsel in thinking about case strategy.

Next, the funding agreement is finalized and signed. Disbursements to attorneys and related service providers are made in accordance with a predetermined disbursement schedule or with litigation milestones. Reporting systems track expenses, and investment resolution takes place upon final ruling or settlement of the case.

For law firms, LF represents an innovative way to attract large matters by offering clients a strategic solution for pursuing legitimate claims they otherwise could not afford. Many companies are hesitant to pursue meritorious litigation due to the risk entailed in expending significant reserve or future capital. Third-party funding preserves an organization’s capital for core operations. Bringing LF to a client demonstrates sophistication and sensitivity to business goals on the part of the law firm and commitment to the relationship by offering a means for the client to share the risk of litigation. With a strong understanding of the LF process, lawyers can unlock opportunities their clients may have not even considered.

Outside financing means the best resources can be brought to bear on a particular matter so plaintiffs have the means to hire the most experienced counsel and lawyers can prepare cases with top experts.

LF not only helps law firms meet increasingly demanding standards for delivering legal services in a cost-effective fashion, but also assists with cash flow issues at the firm itself. Full billable arrangements can often mean cash-strapped clients owe millions of dollars pending the resolution of a case. LF can normalize firms’ revenue streams without compromising their profitability with large debt loads. With an informed approach to using LF, lawyers can grow their practices and increase firm profits.