Even when you have a strong case, here’s how you can benefit from the use of litigation finance

Group think

At Omni Bridgeway (f/k/a Bentham IMF), we occasionally hear some variation of the following statement: “If our case is so strong, why would we give up a piece of it to a litigation funder when we could keep all the proceeds for ourselves?”

Obviously, any business owner would want to retain the entirety of a successful judgment or settlement, but the challenge, of course, is that litigation is inherently risky. A single adverse ruling by a judge or arbitrator can destroy a case, and even the most meritorious claim can fail for unexpected reasons. By assuming all the risk, a claimant keeps the entire upside of a successful case, but simultaneously assumes all the downside as well, which is in the form of millions of dollars of fees and costs (money which could be better spent on growing its business).

Litigation finance offers a more rational path to a recovery—one that significantly reduces the company’s risk, improves its balance sheet, and increases the chances that the company will maximize the full potential of its claims.

A Host of Risks

A claimant planning to bring a meritorious business case against a well-heeled defendant has an important financial decision to make at the outset. Any business, whether it is small and cash-crunched or large and well-capitalized, faces the reality that it must spend significant amounts of precious capital that could be better spent on supporting and growing its business than on prosecuting its claim. A well-heeled opponent often makes litigation more expensive than expected through discovery, motion practice, and other scorched-earth tactics.

Unless a company has millions of excess cash on its balance sheet, outside financing in some form often is required to make it all the way through the end of the case. Traditionally, companies were forced to utilize bank loans or lines of credit, but litigation funding now provides a better, risk-adjusted option that aligns more closely with a claimant’s interests. While an interest rate may be less expensive on paper than a litigation funding arrangement, a bank loan must also be paid back no matter the result of the case. Litigation funding, on the other hand, is non-recourse, which means that the funder recoups its investment only in the event of a successful recovery or settlement.

In the case of a well-capitalized company, committing its resources to a long litigation battle can starve other corporate priorities. And the expenses incurred during litigation can serve as a significant drag on the balance sheet, with no corresponding increase in potential revenue. An anticipated recovery, under generally accepted accounting principles, cannot be recorded as future income. In fact, even if the company is successful in a case, a recovery is recorded below the line as “special income”—thus sapping it of the ability to show increased revenues and profits.

To save on costs, companies also may hire a law firm on contingency to handle the matter. But often, firms with the skill and acumen to handle a complex business dispute do not handle cases on full contingency. Most Am Law 200 firms are hesitant to assume the financial risk for the entire case. Funding from Omni can be used to hire the best possible counsel for the case, instead of settling for less experienced or less capable lawyers in an effort to save money. Omni works with the client and firm to align interests, giving them the opportunity to create a partial contingency arrangement. This is a far more attractive prospect for many law firms.

To learn more about the benefits of litigation finance for your company by visiting our Company Insights, which offers CLE seminars to companies interested in working with funders and our recent client podcasts, blog posts and videos. Or contact us for a consultation about the ways we can help you pursue meritorious claims.