The legal experts speak: Everything you wanted to know about funding (but were afraid to ask)
Which criteria do litigation funders use to make decisions about their investments? What issues should counsel consider when contemplating a funding relationship? How can in-house law departments benefit from financing their litigation assets? And what have counsel learned about the financing process after working with funders?
To help answer these and other key questions about legal funding, Omni Bridgeway recently partnered with The Legal 500 for a lively webinar featuring an expert panel of in-house counsel and senior litigation partners from major U.S. law firms.
The program, “Everything You Wanted to Know About Third-Party Funding in the U.S. (but Were Afraid to Ask), was led by Matthew Harrison, Omni Bridgeway’s Senior Investment Manager and Director of Complex Strategies—U.S., and also featured: Effie D. Silva, Global Ethics & Compliance Leader, Cargill; Roman Silberfeld, Partner and National Trial Chair at Robins Kaplan and president of the International Academy of Trial Lawyers; K. Luan Tran, Partner, King & Spalding; Mark Litvack, Partner, Pillsbury Winthrop Shaw Pittman; Steven Cherny, Partner, Quinn Emanuel Urquhart & Sullivan; and Robert Counihan, Partner, Fenwick & West.
For the full discussion, click here. Below, we highlight a few key points from the discussion.
- What factors do funders consider when they decide to invest in or reject a case? Funders like Omni Bridgeway provide non-recourse financing for highly meritorious claims in complex commercial cases. The parties in these cases are represented by competent counsel—often from elite law firms. Omni Bridgeway, like most other reputable funders, proceeds with a small fraction of the cases that it reviews for investment. Harrison explained that funders turn down funding opportunities for a host of reasons, including that the merits are not strong enough, the expected damages are insufficient to provide the funder with an adequate return or the claimant a fair share of any proceeds, the requested investment is not large enough to meet minimum thresholds, or the funder has collectability concerns.
- Aligning interests—a key issue. Robins Kaplan’s Silberfeld, who has been working with Omni Bridgeway and other litigation funders since the inception of the U.S. funding market, emphasized the importance of ensuring that the interests of the client, counsel, and funder are aligned in the tripartite relationship. “The best relationships are the ones where there is a really good alignment between those interests,” Silberfeld said. “If you make the right decisions about what to fund, then there's enough left at the end of the day to pay the funder and the lawyers, and to leave the clients feeling a sense of justice that they got their day in court.”
- The view from in-house. As Cargill’s Silva noted, law departments have traditionally been “seen as cost centers for corporations. If we want to bring a case to internal stakeholders, we have to give economic reasons for why it makes sense. We must run the same gauntlet as funders when analyzing whether to take on the burden of funding a case.” Sharing financial risk with a funder, Silva said, “is a really smart way for corporations to go about getting economic fairness” and partnering with a funder to monetize litigation assets can give in-house counsel an opportunity “to be seen as more revenue producing.” She added that funding can also be a critical driver for diversity, creating opportunities for women and people of color to build new relationships and pursue cases “that can make careers.”
- Understanding a client’s expectations. One important question is whether a claimant is making litigation decisions based upon a desire for a monetary judgment, or rather, in an attempting to inflict pain upon its adversary. “You need to understand your client’s goals” for the case, said Pillsbury Winthrop’s Litvack. A financially motivated client—one that is more likely to move to the settlement table—might be a better fit for funding than one determined to punish a defendant and go to trial at any cost, the panelists observed.
- The benefits of a rigorous underwriting process. Reputable funders like Omni Bridgeway engage in a rigorous underwriting process before making investments. They dispassionately evaluate the strengths and weaknesses of cases and assess the likelihood and size of potential damages. “The difference between a very good funder and not-so-good funder is the internal ability to help you assess the case,” said King & Spalding’s Tran. Quinn Emanuel’s Cherny noted that the underwriting process “is one of the unexpected benefits” of the funding relationship. “I have found that the more we deal with funders, the better decisions that I and my firm make in terms of the risks we decide to take on,” Cherny said. Funders, he said, can improve the quality of cases being pursued “because those cases are not being brought on emotional bases.”
- The cost of funding. Clients can and do ask counsel tough questions about the higher cost of funding cases. While financing is more expensive than a traditional bank loan, it involves significantly greater risk for the funder than loans do for a financial institution. The longer a case proceeds, the more dollars are at risk for the funder. And litigation funding is non-recourse, which means if the case is unsuccessful, the funder does not get paid. “You can go to a bank and borrow money at a lot lower cost, but I will promise you it will not be non-recourse,” Litvack said.
- Ethical issues. From a legal ethics perspective, Silva said lawyers entering a funding relationship should be most concerned with ensuring their independence. “You need to make sure the attorney is not directed or regulated by the funder,” she said. In addition, clients should be informed at all times about every aspect of the case and the funding relationship. “You don’t ever want the client to be in the dark.” Silva commented. Silberfeld added: “Who’s the client? Who’s the decision-maker? All this has to be in writing, and it has to be clear and unmistakable.”
- Trends in international arbitration. Tran, whose practice at King & Spalding focuses on international arbitration and global disputes, said funding is becoming an “integral component of the international arbitration equation” due to the growing scope and expense of most international arbitration matters. “Litigation funding is here to stay in the international context,” Tran said, noting the expansion of funding in Asia and new rules regarding funding recently promulgated by leading arbitral organizations.
- Budgeting issues. Litigation is expensive and uncertain, and budgets set at the beginning of the case may not be sufficient if the case takes an unpredictable turn or if a law firm spends money unwisely. “I actually tell my associates and fellow partners on a funded case that you need to be more careful how you build your cases, because it's very expensive money. It's not unlimited funds,” Tran said. As part of the process, a funder may review expenses in an effort to keep the litigation budget on track. This helps claimants avoid taking on additional capital, which they must later repay (often at a multiple) from any litigation proceeds. “I know that if I don't keep costs down there may be a significant shift in terms of who's getting paid what at the end of a case,” Cherny said. “I'm incentivized to keep costs down. Otherwise, either myself or the client is going to end up with less.”
- Settlement dynamics. Reputable funders may ask to remain informed about the settlement process, but as with other aspects of litigating the case, they do not intervene or attempt to control settlement negotiations. “I find it’s the easiest part of the relationship to deal with,” Litvack stated. “[Funders] don’t want to be viewed as dictating a settlement, and they don’t dictate it.” Silberfeld added that attempts by a funder to control the settlement could create ethical issues for the attorney and corrode relations with the client. He advised: “If a funder wants to control a settlement…run the other way.”
To learn more about Omni Bridgeway’s litigation funding capabilities, visit our Company Insights. While there, explore our recent podcasts, blog posts, and videos. Or contact us for a consultation to learn more about the ways we can help you pursue meritorious claims.