Forum: Litigation finance as a multi-tool for corporate law departments

Litigation funding may hold the key for corporate law departments to effectively manage their outside counsel and gain the leverage to pursue high-value litigation.

The financial and operational pressures on corporate law departments have been strenuous for years and are only compounding amid today’s economic environment. In fact, 88% of general counsel expect to reduce legal spend over the next three years, 76% struggle to meet current workloads and 75% predict that workload growth will exceed budget limitations, according to a recent survey from Harvard Law School Center on the Legal Profession and Ernst & Young.

More worrisome, law departments facing the expenses of modernizing technology and more effectively managing outside counsel may lack the financial resources they would otherwise leverage to pursue high-value litigation that could generate healthy returns for their company.

Litigation finance can help address the latter problem. Under this process, funders provide capital for fees and costs to pursue commercial litigation in exchange for a share of the eventual recovery. The funding is passive – meaning the funder has no decision-making authority – and the funder receives its deployed capital and return only if the litigation results in a recovery. The funder assumes the financial risk of loss and there generally exist no litigation expenditures that could drag down the company’s financial statements. A win vindicates the rights of the company and can yield financial returns, helping move the law department beyond being viewed as a simple cost centr.

Given mounting budgetary pressures on in-house legal teams, the time may be right for a deeper understanding of what litigation funding is – and isn’t – and how it can help.

Litigation funding structures and uses

There are several types of litigation funding structures of which department leaders should be aware, including:

Single case funding— In this instance, the funder provides capital to cover the fees and costs to pursue a single action. If the company loses, it owes the funder nothing. If the company prevails, the funder receives its deployed capital plus a pre-negotiated share of the recovery.

Portfolio funding— Here, the funder provides capital to cover the fees and costs for a portfolio of the company’s cases. The funder’s deployed capital is collateralized by the cases in the portfolio. The company still owes nothing if it loses all cases in the portfolio. If the company prevails in any of the cases in the portfolio, the funder receives its deployed capital plus a pre-negotiated share of the recovery.

Portfolio funding is typically less expensive than single case funding, meaning the funder receives a smaller portion of a recovery. That’s because portfolio funding is less risky as funders recover their investment if any one of several cases in the portfolio resolves favorably. This diversification allows funders to offer better pricing terms for portfolio funding.

Judgment monetization and appeals funding— In this scenario, the funder provides capital secured by the future recovery on the judgment. If the company ultimately fails to recover on the judgment – ​​either due to collection obstacles or a reversal on appeal – it owes the funder nothing. If it recovers on the judgment, the funder receives its deployed capital and a pre-negotiated share of the judgment.

Seven benefits of litigation funding

There are several key benefits for the corporate law department that pursues litigation funding situations:

Law departments often face a conundrum when deciding whether to pursue affirmative litigation. They must weigh the company’s rights and potential damages recoverable against the finite resources and the unpredictable, expensive and lengthy nature of litigation. In-house counsel – particularly those facing budget cuts and workload increases – may conclude that affirmative litigation is too risky or unjustified in light of more pressing department objectives, despite the serious merit and value of the unpursued claims.

According to one survey, 49% of senior financial officers said their companies “failed to pursue judgments due to cost in 2020, with half of those reporting the amounts at stake to total $20 million or more.”

With litigation finance, companies can pursue claims and judgments at no risk. A loss costs the company nothing, and a win is a financial windfall that transforms a law department into a profit generator that adds tremendous value to the company.

Claims are not recorded as assets on a company’s balance sheet, but the expense of paying lawyers and out-of-pocket litigation costs are included as liabilities. Litigation therefore adversely impacts a company’s financial statements.

But when litigation funders provide non-recourse capital to cover fees and costs, the funder assumes the risk of loss on the litigation, and companies can remove litigation expenditures from their balance sheets.

Law department budgeting is notoriously difficult. Factors beyond the control of departments may trigger sizeable and unforeseen fluctuations. Litigation funding can help by covering the expenses of ongoing litigation, immunizing the department budget from an adversary’s expensive litigation tactics or outside counsel’s oscillating fees on the funded matters.

In-house departments can also leverage their funders’ expertise in arranging innovative alternative fee arrangements with outside counsel, helping to create a more economical relationship with outside counsel, without the opportunity cost of devoting valuable in-house resources.

Most corporate law departments must increasingly do more with less. Effectively managing this dynamic requires innovation, which in turn requires investment in new people, services or technology – often a tough sell when companies expect their law departments to economize.

Litigation funding allows companies to reallocate what would have been spent on litigation toward investments that streamline the department. Put differently, with funding, companies can pursue litigation to vindicate their rights, preserve the potential of a large judgment and facilitate investment in operational enhancements.

Companies and litigation funders alike want to win. And litigation is often a prime example of the axiom “you get what you pay for.” So companies partnering with a funder generally need not be bargain shoppers – they can hire the best lawyers and experts to advance their claims.

Moreover, companies that have yet to engage a law firm or need to add local or specialized counsel will benefit from the deep network of world-class lawyers that well-established funders maintain.

Litigation also finances functions as a no-cost means of validating a company’s claims. Before agreeing to fund a case or portfolio on a non-recourse basis, litigation funders undertake due diligence review and analysis.

Funders evaluate the evidentiary and legal strength of each claim, its financial merits, and the anticipated defenses and counterclaims. An unbiased review from a team of economically rational experts at a developmental stage of the litigation can greatly improve the strategy and value of the case.

Corporate law departments can continue to receive support from litigation funders throughout the litigation life cycle through funders’ own in-house legal experts whose specialized experience can provide an extra layer of review and advice throughout the litigation.

Conclusion

Budget cuts and proliferating workloads threaten the status quo for many corporate law departments. Because of this, many law departments may regard affirmative litigation as too long, risky and costly to pursue.

However, now may be the time to innovate with new tools – and litigation finance is one such tool. It allows companies to exploit the financial value of affirmative litigation at no cost and no risk and with their preferred lawyers. This, in turn, empowers law departments to overcome operational challenges, shift perceptions about their value and generate returns for their companies.

Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias. Thomson Reuters Institute is owned by Thomson Reuters and operates independently of Reuters News.