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At its most basic level, litigation finance is very straightforward. A third-party funds legal fees and expenses associated with a litigation or arbitration, in return for a portion of the ultimate proceeds (settlement or judgment), if any. Importantly, the funding is typically “non-recourse”, meaning that if there is no recovery for the plaintiff, the litigation financier receives no fee.
Claimants have historically found ways to fund their cases – with available capital, through a bank loan, or by agreeing to a contingency fee with their attorney. What has changed recently is the emergence of specialty finance companies that limit their work to the financing of litigation. These firms – which first appeared in Australia a decade ago, and are now active in the United Kingdom and the United States. They typically invest in large-scale and complex commercial litigation, with investments (and thus legal fees) on the order of several million dollars.
Not all cases are appropriate for litigation financing, and certain criteria must be met as part of a careful due diligence process. Four considerations include:
- the merits of the claim – the case must stand a very strong chance of success on the law and facts;
- the ratio of costs/proceeds – the ratio of legal fees (and other costs) must be in proper proportion to the expected proceeds (to allow for reasonable costs associated with financing – typically a ratio of at least 1:4 is required);
- the duration of the proceedings – as the cost of financing will usually be related to the time the case takes to resolve (given the time value of money), notice must be paid to the expected length of the case; and
- the enforceability of judgment – it must be clear at the outset that, if the claim is successful, the plaintiff will be able to collect its judgment from the defendant.
Once an investment is made, litigation financiers are careful as to their involvement in a given case. Important rules of legal ethics are respected so that the funder does not interfere with case strategy, settlement decisions, or the attorney-client relationship. And, as mentioned above, the financing is typically kept confidential between the parties.
Given the challenge of drawing in new clients, law firm CMOs must leverage every available advantage. In several business development scenarios, the prospect of litigation finance can help:
- Fee negotiations – in situations where a client would prefer to work with a given firm – but the client will not (or cannot) pay the firm’s standard hourly fees – financing can be used to pay such fees and allow the case to proceed;
- Alternative to contingency fee – in situations where a firm is asked to act on a contingency fee basis, a litigation financier can step in to provide a similar result: the firm receives its standard hourly fees, paid for by the funder, which in turn only receives compensation in the event of a “win” (sometimes referred to as a “synthetic contingency”);
- RFP (request for proposal) – in situations where an RFP has been issued by a potential client, a firm’s response may be better received if it makes proper mention of litigation finance as an innovative variation to AFA (alternative fee arrangements); and
- Fee “fatigue” – in situations where an existing client involved in extended litigation has begun to express concern regarding mounting fees (perhaps on the eve of trial), litigation finance can offer immediate cash-flow relief and allow the firm to receive its full fees.
In short, litigation finance can offer law firm CMOs (and anyone involved in legal business development) a new tool with which to hammer out difficult pricing issues and fee structures for big-ticket litigation.
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